Since the beginning of May, the Russian stock market has continued to consolidate without demonstrating directional movement. I continue to believe that the consolidation will end with the decline of the MICEX index to the level of 1800 and possibly even lower.
First of all, the Russian market can no longer maintain its growth based on rising oil prices. Earlier, I showed that today's fundamentally justifiable price per barrel is at the level of $40, and I believe the market will fall to that level during the quarter. A growing active rigs count in the United States significantly reduces the likelihood of a decline in production in the U.S. This, in turn, means that Saudi Arabia and, therefore, OPEC, will not take steps to limit production inside the cartel. But this is only one side of the situation.
Specifically, Russian oil companies start experiencing strong competition from Iran on the European market. According to Bloomberg, as of June 21, the discount of Russian oil in relation to Brent has already reached the record value of $2.4 per barrel. Given the aggressive policy pursued by Iran in order to recapture lost markets, the conditions of the rigid competition will remain for a long time and affect the performance of the Russian oil companies that constitute the majority of the Russian stock market.
On June 10, 2016, the Central Bank of Russia lowered the interest rate for the first time since August 2015. The reduction amounted to only 0.5 and was accompanied by very cautious comments. Given the many risks of both external and internal nature, I doubt that this action of the regulator can be considered the beginning of the cycle. Moreover, inflation expectations remain high in the country, and in July the regulated prices and tariffs will be indexed in accordance with stated Government's plans. Thus, the Russian economy will have to operate under the conditions of a fairly tough monetary policy for an indefinitely long period of time.
Based on the May results, the PMI index of the Russian manufacturing industries remains below the critical 50, although it has increased relative to the previous month. It is disturbing, though, that yet another decline in new orders was fixed. Besides, the reduction in new orders has occurred mainly due to the falling export component. The decline in the manufacturing industry in Russia has continued for six consecutive months, and it is not pointing to a qualitative improvement in the economy.
I often come across the statements that foreign investors are interested in the shares of the Russian companies. Alas, the facts suggest otherwise. According to Emerging Portfolio Fund Research, for the week ending June 15, the investors have withdrawn $232 million from the funds targeting the Russian assets, against the inflow of only $80.3 million a week earlier. At the same rate, calculated cumulatively, since the beginning of the 2015, total net outflows amounted to $548 million, and the trend shows a clear acceleration of the outflow.
The dividend payout period on the Russian shares has begun this month, and this usually has a negative impact on all the local stock market. This is not the key factor, but it is still worth some attention.
It is worth noting the resistance of the Russian market, but everything has its limit, and I think the Russian MICEX index will drop below the level of 1800 in the nearest future.
Note: Unless otherwise stated, all the charts included here are my own.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.