NN IP overweights Russian corporate bonds

The Russian credit universe benefits from strong technical demand created by combination of limited supply and few investment alternatives. NN IP’s Emerging Market Corporate Debt strategy is overweight Russia by 5%, despite the country’s severe recession and still relative inflated inflation.

Russian corporates have weathered the storm remarkably well and there are excellent opportunities by focusing on companies with strong credit profiles, good liquidity and modest domestic exposure.

Overall, the Russian credit universe benefits from strong technical demand. Due to sanctions, there is still a very limited supply of new bonds and there is a strong demand from local investors who are flush with cash and short of investment opportunities. This technical demand pervades given the current economic situation but over the next 12 months it may dwindle.

Our Emerging Market Corporate Debt strategy is overweight Russia by about 5%. Within the broader EM universe, the risk-adjusted compensation for high quality Russian credit, supported by a strong technical driver, remains attractive and warrants a selective overweight.

The Russian economy is showing initial signs of recovery after a steep decline in 2015, when it contracted by 3.7%, driven by the collapse in oil prices and the rouble. The tough situation was exacerbated by the international sanctions imposed by the EU and US for Russia’s role in the Ukrainian conflict.

To counter the contraction, the government conducted a number of effective macro policy responses to make the economy less dependent on oil prices. The central bank switched to a floating currency regime, letting the rouble depreciate sharply against the US dollar. This also preserved the strength of Russian FX reserves. These reserves, coupled with a low external debt-to-GDP ratio for the sovereign, act as a bulwark against global headwinds.

In terms of valuation, the Russian credit universe has tightened to pre-crisis levels as the sector recovers but there are still attractive opportunities for stock pickers, particularly in the oil & gas industry and to a lesser extent in high quality metals and mining as well as telecom names.

Compared to global peers, the Russian oil majors have been less impacted by the sharp oil price decline. Profitability has been resilient on the back of currency depreciation and a progressive tax regime that is linked to the oil price.

The major metal & mining companies expect demand for flat and long steel products to contract by 5-10% but the negative impact on these corporations is partially offset by their ability to redirect steel and ferrous products to export markets. They also benefit from cost leadership and strong balance sheets with very low leverage.

Telecom operators also have significant domestic exposure but they benefit from resilient demand, have improved their balance sheets through asset sales and investment adjustments and have repaid their foreign debt.

Willem Visser, credit analyst at NN IP

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