The Russian Eagle. January 2021 - More Than Just Mean Reversion in 2021

Global markets rallied after vaccine announcements in the hopes that mass vaccination will herald a return to normalcy. Since such optimism is ubiquitous, it is important to understand to what extent the cyclical recovery is already in prices. We argue that the rotation into cyclical stocks still has legs, especially given the prospects for across-the-board economic growth and a weaker dollar. > Driven by global trends. Country-specific factors have had little bearing on the performance of individual Russian stocks and sectors in 2020; instead, they have moved in tandem with global peers. This pattern will likely persist in 2021 as the world recovers from the pandemic.> Weaker dollar will continue driving rotation into cyclical stocks. Dollar weakness will be the most powerful driving force for global markets in 2021. This should push commodity prices higher and support GEM assets. In the past, the best way to get exposure to global growth was to buy tech and EM consumer stories, but in 2021 it appears the best way will be to buy commodity stocks.> Some trends will see mean reversion in 2021... Normalization of business activity in 2021 should deliver 3.5% GDP growth in Russia and 5.2% globally. In the meantime, Russian fiscal policy will return to a conservative stance, putting a drag on the recovery. Consumption patterns will see mean reversion, with demand for services soaring at the expense of demand for goods.> ... but some will persist. Softer monetary policy is a lasting phenomenon both globally and in Russia. Low rates will continue to push retail investors into the stock market. This means that the multiples expansion in Russian stocks will prove sustainable.> Index target. We do not expect any further multiples expansion. However, the cyclical recovery in earnings provides decent upside for the market. We expect the P/E of the RTS to stay at around 8, while the forward EPS could grow 25%, assuming $55/bbl oil for the next year. This translates into a target for the RTS Index of 1,700 and for the MOEX Index of 3,800.> Top picks. Metals and mining stocks provide the best exposure to the cyclical frenzy. We like Severstal, NLMK and MMK, as well as Nornickel. In the energy space, Gazprom looks attractive given the rapid gas price recovery. Among oils, we favor Rosneft and Tatneft. In other sectors, we like TCS Group, MTS, Mail.ru, X5 Retail, OGK-2 and LSR.