Brazil-Russia: 20% separates the two - Natixis

Analysts at Natixis explains that since the start of the year, emerging equity markets have turned in some of the best performances and in particular, they observe a very significant underperformance of the Russian equity market against its Brazilian counterpart, the MSCI Russia shedding nearly 10%, whereas the MSCI Brazil has put on 10%, this even before last week’s sudden downturn in crude oil prices, which saw Brent plunge from $56/bbl to $51/bbl.

Key Quotes

“We consider different potential factors:

- PMI business indicators to gauge the relative outlook in terms of economic activity, which reveal that both Russia and Brazil have enjoyed a cyclical improvement;

- Exchange rates for the Brazilian real and Russian ruble against the US dollar;

- Performances recorded by agricultural commodities relative to energy commodities: Russia’s fortunes ride mainly on crude oil prices (60% of the country’s exports in 2015 according to Chelem), whereas Brazil is an exporter of agricultural commodities (37% of the country’s exports in 2015).”

“Of late, it is both the favourable cyclical momentum and the relative change in the price of agricultural commodities (compared with energy commodities) that appear to explain Brazil’s outperformance.” 

“Exchange rates and the relative performance of energy and agricultural commodities are the most significant determinants statistically. What can be observed is that a currency depreciation in the past tends to pave the way for an ex-post appreciation of the equity markets (a significant depreciation being interpreted as a value indicator) and that an outperformance of agricultural commodities relative to energy commodities is favourable to Brazilian equities.” 

“Bottom line: Given our bullish scenario for crude in H2 2017 (we see Brent recovering to $65/bbl at end-2017) and our positive macroeconomic predictions for Russia (1.8% GDP growth in 2017 vs. 1.3% according to the Consensus Forecast), and even though we expect the Russian ruble to appreciate slightly (taking the USD/RUB to 57), our view is that Russian indices have rebound potential in coming months.”