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Foreign Exchange

SocGén urges investors to hop on RUB bandwagon; liberalization a game changer

The opening up of Russia’s bond markets is a game changer that will boost the rouble, according to Société Générale.

“We are bullish on Russia, we are bullish on the RUB, on the local bond markets and the equity market, as well as the corporate bond market,” says Benoit Anne, head of EM FX strategy at SG. The call to hop on the RUB bandwagon comes as Russia moves to open up its capital markets as part of a push to establish Moscow as an international financial sector.

The French bank say the liberalization of Russia’s bond market, which is likely to materialize in December and January, will put the country “on a totally different level” with international investors.

It will give them access to a $100 billion debt market, almost as big as that of South Africa.

SG estimates that liberalization will create inflows worth between $30 billion to $40 billion into the local bond market and that appetite is likely to extend to the corporate bond market as well.

Foreign investors have been increasing their exposure to the Russian bond market (OFZ), more than doubling their holdings since the start of the year to over $6.6 billion, according to the latest data from Russia’s central bank.

“This still represents only 6.6% of the total OFZ outstanding – a share that may easily triple,” says Anne.


 Locals dominate OFZ investor base.....

 
 Source: SG

 ....but foreigners are ready to flood in

 
 Source: SG

On top of the expected inflows into Russia, Anne says renewed fiscal discipline from the country’s government sends a positive signal to investors and will support its asset markets.

Monetary policy should also support the RUB, with Russia’s central bank working hard to establish its inflation-fighting capability.

The central bank, which delivered a surprise 25-basis-point rise in its key interest rates in September, is likely to continue to tighten policy as it fights rising price pressure, according to SG.

Anne says he likes the RUB even more after its recent weakness, recommending a tactical long position against its EUR/USD basket, with a target of 33.60 and a stop loss of 35.60.

He says, given its high-beta status, the RUB is well positioned to benefit from the liquidity-driven rally sparked by the loose monetary policy stance of the Federal Reserve and the European Central Bank.

 High oil prices should support RUB

 
Source: SG 

Furthermore, although gaining back some of the ground it lost during its last sell-off in late spring, Anne still finds the RUB relatively undervalued compared with the price of oil – a primary Russian export.

“The RUB is a laggard, which is being liberalized by the central bank, and there is a lot of room for catching up with its peers,” he says.



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