Is it possible to make money on the weakening of the ruble

2023-09-06 13:21:27

In the normal state of the Russian stock market, good months alternate with bad ones, especially when there are high geopolitical risks. But this year, a number of factors keep the growth from stopping.

First, in the first half of the year, the normalization of the activities of companies after the infrastructure and geopolitical crisis last year affected. Issuers gradually returned to regular financial reporting and dividend payments. This weakened the uncertainty in the investment history and, accordingly, the risk premium in the shares. That, in turn, contributed to the restoration of quotations.

The pioneer of normalization can be called the market leader – Sberbank. The dynamics of its shares, which significantly outperformed the market in the first half of the year. If the Moscow Exchange index has added a little more than 50% since the beginning of the year, then the bank’s securities – 87%. Sberbank reported for the II quarter at the very beginning of August, showing a record profit – 380.3 billion rubles.

The Sberbank factor still contributes to the further growth of shares. Many companies published IFRS financials last week, albeit in a limited form, after a one and a half year break. The driver for this was the decision of the government to support the market by increasing transparency, in particular, without extending the Decree No. 2131, which was valid until July 1, 2023. Previously, a government decree allowed no data to be published.

Secondly, Russian investors are left with few options where to put their funds due to the introduced capital controls. Hence the constant influx of new money into the Russian stock market. The volume of trading in shares on the Moscow Exchange exceeded 1.5 trillion rubles. per month – a level that was observed on the market only in 2020-2021.

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Thirdly, the devaluation of the ruble justifies higher stock valuations. The fundamental dependence for commodity exporters, which are the majority in the index, is extremely simple: the foreign exchange component in revenue is high, while operating costs and capital investments are low. Accordingly, the weakening of the ruble significantly improves financial performance.

For clarity, here is an example of calculations for UC Rusal, one of the commodity companies most sensitive to the weakening of the ruble. Its papers did not participate at all in the general rally on the Russian market. The reasons for this may be the lack of dividend payments and the announcement in June of the company’s construction in Ust-Luga of a new alumina plant worth 400 billion rubles. True, these investments are planned to be stretched right up to 2032. The first stage of production with a capacity of up to 2.4 million tons per year will be commissioned before the end of 2028.

Current market price of shares UC Rusal is at the level of 42 rubles, and from the calculation table you can see that this price level corresponds to the assumption of an average level of the dollar / ruble exchange rate at 80 in the next couple of years. The current rate is close to 100. Investment analysts have already begun to revise the forecast for the ruble to 85-90. With such an introductory forecast for the ruble shares UC Rusal can cost more than 50 rubles. That is, with 20-30% potential growth.

This statement is true for the general market as well. Along with the growth of the share price, forecasts for profit increased against the background of the weakening of the ruble. As a result, the estimated multiplier for the Moscow Exchange index (index value / estimated net profit for the next 12 months) remained practically unchanged at level 5, with an average historical level slightly above 6. With further recovery of the multiplier, the index still has growth potential above 20%, provided that forecasts are maintained by profit.

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Our market remains connected to the world through commodity prices. Earnings forecasts could suffer in the event of a global recession. In China, the main consumer of raw materials, the measures taken to stimulate the economy are clearly not enough. Weak consumer demand against the backdrop of a crisis of confidence due to the developed debt crisis in the construction sector had a negative impact on the recovery of sectors such as transport, retail and hospitality after the lifting of anti-COVID restrictions.

In the US, the economy looks strong at first glance, but in June the number of new bankruptcy cases has already caught up with the average level of pre-Covid years. Therefore, we can expect a noticeable increase in unemployment in the second half of the year. If the Fed continues to stick to tight monetary policy on inflationary fears (the same oil prices are high again), then the economy may go into recession.

Therefore, the prospects for the Russian stock market, of course, are not cloudless. But there is no need to wait for a sale on the market in the current conditions. With the weakening of the ruble, the fundamentally justified estimate for the Moscow Exchange index is higher than the current values. Add to this the predominance of ordinary investors in the market, who, unlike professionals, may not be limited to fundamental estimates based on financial results forecasts due to higher risk appetite, and we get a high probability for the market to break new records in the duration of the rally.

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