Russian equities were undervalued relative to the Kremlin's credit.
All, however, is not hunky-dory in the Russian economy.
Boris Yeltsin was once asked to describe the outlook for the Russian economy in a Moscow Press conference. "Good," he replied. When a reporter asked him to elaborate on his answer beyond a one-word reply, Yeltsin growled "not good".
This is the riddle in a mystery in an enigma syndrome that so baffled Churchill and every Russia watcher I know in either the financial world or the twilight world. So I try to focus on a few key metrics to track the Rodina in real time - the price of crude oil, the rouble, Eurobond yields, the Kremlin's credit default swaps and the price of the Russian country index fund listed in New York (symbol RSX). I had recommended RSX as a buy at 14 in April as I was sure the rouble was grossly undervalued relative to Brent crude oil and Russian equities were undervalued relative to the Kremlin's credit despite post-Crimea sanctions and the wars in Syria and Ukraine. Three months later, the RSX index fund trades at 18 or almost a 28 per cent US dollar return in three months. Spasiba, Russia!
Brexit, the payrolls number, no Yellen Fed monetary tightening and the imminent mother of all "shock and awe" QE by the Kuroda Bank of Japan all spell the carry trade in high-yield emerging markets to me as a "summer sizzler" macro trade for 2016. This is hugely bullish for the Russian rouble, the South African rand, the Brazilian rand the Indian rupee as long as these are financed by shorting the Japanese yen and the British pound (O Queen Theresa May be Not, remember the Tories love to knife their own leaders. Regicide. Never forget the fate of Mrs. Thatcher, Edward Heath, Anthony Eden, Neville Chamberlain, MacMillan, Douglas Hume, IDS, William Hague, Uneasy lies the head that wears the Tory crown!). These macro rhapsodies convince me that this is no time to take profits on the Russian RSX idea. My other emerging markets equity ideas of 2016 have also been fabulous winners. Pakistan's Habib Bank is up 35 per cent in three months as Karachi is Asia's best-performing stock exchange. The Thrilla in Manila idea - buy Filipino property developer Megaworld, up 30 per cent while so many GCC property developers will not emerge alive from this protracted bear market. Offplan property investing? About as attractive as a hole in the skull for a rational investor.
I am acutely conscious that all is not hunky-dory in the Russian economy. The contraction and capital flight since 2014 makes the Brezhnev era look like a model of rational economic policy making. It is significant that Russian business conglomerate (called oligarchs by fascist-Nazi enemies of the motherland) are now desperate to unload their luxury palaces in Londongrad, though not their megayachts in Villefranche-sur-mer or St Jean-Cap Ferrat, let alone their après-ski secretarial training schools in Courcheval!
Putin has ruled Russia for 17 years now and is the most powerful Russian leader since Stalin. The Brezhnev Politburo was run by cautious, risk averse apparatchiks with none of Putin's swagger or penchant to gamble. (That only meant a bullet in the cranium in the Stalin's Russia of say, Yuri Andropov or Alexei Kosygin's youth). Putin has literally reinvented the Kremlin in his own image. Wages for the FSB and the military surge while the population faces the first real wage decline since the fall of the Soviet Union. Medvedev and Shuvalov rhapsodise over Singapore but Lee Kuan Yew would never tolerate corrupt billionaires in his cabinet. The countersanctions against Turkey have increased food inflation. There is no rollback of Kremlin meddling in the courts, banking or foreign trade relations.
The world's mantra is privatization but Putin has led to the biggest peacetime nationalisation in world economic history this side of Kim McDuck's self-declared Stalinist heaven North Korea. Pension reform? A joke. Municipal finance reform? Non-existent. Banking reform. The central bank has revoked the licences of dozens of smaller criminal "pocket banks" but dare not go after the world's richest banksters who enjoy the patronage of Tsar Vlado the Baddo. As an economist, a Russophile, a student of history, I see no investment case in Russia. As a tactical equities investor, I see no reason why 2016 cannot end with a 40 per cent US dollar profit for owners of the Russian equities index fund RSX.
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