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What’s Supporting the Recovery in the Russian Index?

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Russian index’s earnings versus crude oil movement

Russia (RSX) is an oil-dependent economy. The crude oil (USO) (UWTI) (UCO) downturn started in June 2014. Crude oil fell as Saudi Arabia, the world’s largest producer of crude oil, decided not to cap its production. The graph below illustrates how the MICEX (Moscow Exchange) Index’s trailing and forward EPS (earnings per share) closely follow crude oil movement.

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Correlation with crude oil movement

Between June 2014 and February 2016, the trailing and forward EPS of the MICEX index fell by 51.4% and 53.3%, respectively. Over the same period, WTI (West Texas Intermediate) fell by 69.1%. The trailing and forward EPS had a correlation of 72.3% and 68.8% with US crude oil (OIL) (USL), respectively.

As per the data released in December 2015 by the Moscow Exchange, oil and gas stocks account for 49.9% of the index’s asset allocation. Big energy giants like Gazprom (OGZPY), Lukoil (LUKOY), Rosneft, Surgutneftegas (SGTPY), and Tatneft (OAOFY) are among the top ten holdings of the MICEX index.

The recovery story

After touching its 12-year low of $26.21 per barrel on February 11, 2016, US crude oil has recovered 69.7% as of August 12, 2016. The recovery in oil prices led to a rise of 27.3% and 11% in trailing and forward EPS (or earnings per share), respectively. These figures clearly support the fact that even though actual earnings started to recover at a faster pace, analysts are conservative about the growth rate of future earnings. The very high interest rates as compared to other emerging nations and the geopolitical turmoil are affecting investor sentiment. The higher lending rate is supporting the currency, but at the same time, it’s affecting the investment sentiment.

In the next part of this series, we’ll analyze what the earnings growth is indicating for India.

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