The Russian Eagle. July 2021 - Entering a Global Capex Cycle

> Global corporates ramping up capex plans. We looked at the capex estimates of 2,750 of the largest global public companies, and the numbers suggest that they are planning to massively increase investments in 2021. This appears to be rational behavior amid soaring consumer demand and prices. Meanwhile, the reasons for ramping up investments extend beyond a simple desire to resolve supply bottlenecks. Other important drivers are the green energy revolution and shift to online sales. This means that the capex ramp-up is not a one-off phenomenon but rather the beginning of a new capex cycle.> Resource sectors are not joining the spending frenzy. Capex in the materials segment will grow only slightly and is even falling in the oil and gas space. The decarbonization push is forcing the global oil majors to retreat and divert more money toward renewables. US shale producers are not reacting to higher oil prices but are rather barely keeping output flat and thus giving more pricing power to OPEC+. In metals, the traumatic experience of the previous cycle has made companies less willing to jump at the opportunity to expand. The sector is not an ESG champion either and now has to pay back perceived environmental debts. Companies are hence investing in environmental projects rather than in capacity expansion. Both supply and demand appear inelastic to commodity price increases, which means that prices may stay higher for longer than many now expect.> Russia may use this opportunity to increase its market share in oil and gas. The global policy push toward decarbonization is moving way ahead of actual technological advances. The numbers suggest that the world still needs new investments in fossil fuels even amid the transition to clean energy. Global underinvestment may give Russian oil companies an opportunity to increase production in the medium term, while for Gazprom this means that its pricing power in Europe will remain strong.> CBR rate hikes in focus domestically. The CBR has hiked rates by 125 bps this year and is planning to deliver another 25-100 bps hike. Bond yields have been moving higher as a result. However, the long end of the curve is becoming insensitive to rate hikes, having stayed flat in 2Q21, and that is what matters for equities. The higher yields trimmed Russia's multiples earlier this year, but going forward we expect no material impact from this side. The RTS Index's P/E should stay range-bound between 7.0 and 7.5. Meanwhile, we expect earnings upgrades to continue supporting the market, particularly in the cyclical sectors.> Top picks. Our top picks are Gazprom, Lukoil, TCS, Yandex, X5 Retail Group, Magnit, Globaltrans and RusHydro.