Money yet to be made in best corporate-bond rally: Russia credit
By Bloomberg
The biggest corporate bond rally in emerging markets this year isn’t finished yet.
Russian company debt has returned 7.8 percent in 2015, the most among 45 markets monitored by Bloomberg indexes, except for Mongolia with a lone security. Yields could fall as much as 100 basis points from here as long as the political situation in the country doesn’t deteriorate further, according to Robert Simpson at Insight Investment Management Ltd.
“Valuations are clearly in favor of buying Russian bonds,” Dmitry Dudkin, the head of fixed-income research at UralSib Capital in Moscow, said by e-mail on Thursday. “The corporate spread over the sovereign is wide. There’s actually plenty of room and plenty of further potential performance, but the rally is of course conditional.”
Investors chasing yields are finding Russian companies an attractive bet this year as corporate credit joins government bonds and the ruble in a recovery from last year’s selloff. Banks and mining companies, including Credit Bank of Moscow and coal producer OAO Raspadskaya, have led this year’s advances. At the same time, some analysts said sentiment could be upended should fighting pick up in Ukraine or oil resume its decline.
Russian corporate bonds slumped 13 percent last year, driven by declines in crude and the ruble, combined with sanctions tied to Russia’s role in the Ukraine crisis. That compared with a 3.4 percent average gain for similar debt across developing nations.
Below Value
The nation’s sovereign bonds are undervalued relative to its credit rating and a rally in them could also lift corporate debt, Konstantin Nemnov, who oversees $1 billion as the head of fixed income at TKB BNP Paribas Investment Partners in St. Petersburg, said by phone. The government’s foreign-currency debt is ranked Ba1 by Moody’s and BB+ by Standard & Poor’s, one step below investment grade following downgrades this year.
“We are trading at single B level with the rating of BB+,” Nemnov said. “The fundamental quality of borrowers, especially those which are export-oriented, remains very strong as costs are in rubles and revenue is in hard currency.”
Russia’s earnings from energy exports have increased this year as signs of stability in oil prices offset a stronger local currency. The ruble price of Brent crude has jumped 23 percent in the last two months, trading at about 3,700 a barrel, compared with the 2014 average of 3,759 rubles, according to data compiled by Bloomberg.
Continued Gains
“To the extent oil prices stay stable and the geopolitical environment does not worsen, Russian corporate debt can continue to outperform,” Jason Trujillo, a senior analyst at Invesco Advisers Inc. in Atlanta, said by e-mail. “We could see upwards of 50 basis points of relative tightening of Russian corporates versus the broader corporate emerging market.”
A cease-fire in the yearlong fighting in eastern Ukraine is taking hold and government troops continued to withdraw weaponry from the frontline. Russia, which invaded and annexed Crimea last year, denies it’s fueling the conflict.
Last year’s slump in corporate bonds has encouraged companies including OAO VimpelCom, PAO Severstal and Evraz Plc to buy back their debt this year. More issuers may follow, according to Insight Investment’s Simpson, a money manager who helps oversee $3.5 billion in emerging-market debt including Russian corporates in London.
Bank of America Corp. recommends a 30 percent overweight position on OAO Gazprom Neft bonds due in 2022 and 2023, saying the securities are cheap relative to parent OAO Gazprom’s debt.
“We do believe there is further room for Russian corporates to rally contingent on no further deterioration in the political situation,” Simpson said. “The sovereign can rally another 100 basis points or so and corporates can at least follow that.”
Political Risk
The rally is threatened by signs of instability in Russia’s domestic politics, Egor Fedorov, an analyst at ING Groep NV, said. More than 50,000 people turned out in Moscow on Sunday to mourn murdered politician Boris Nemtsov. The opposition accused Kremlin of complicity in his death Feb. 27 and blamed the authorities for stirring up an atmosphere of hatred against activists.
“Corporate stories are being eclipsed by increasing contradictions in Russia’s civil society,” Fedorov said. “Given that, I would not talk about political stability Russia enjoyed for the past 15 years which is a cornerstone for all investments.”
Russia’s political struggles haven’t stopped corporate bonds from posting a 1.8 percent gain this month. Investors will be watching the European Union summit on March 19 when Russian sanctions may be debated, Sergey Dergachev, a senior money manager at Union Investment Privatfonds GmbH in Frankfurt, said by e-mail.
“In the absence of any negative news or any news at all, Russian credits should be well supported and enjoy a solid run,” he said.