Growth factor

What influences financial markets in developing countries and can there be any benefits from military operations?

In 2015, investors saw good returns from emerging markets. Unexpectedly, Russia turned out to be attractive. After a serious drawdown in late 2014, the dynamics of the market have noticeably improved, but it is too early to say if this trend is stable. Yes, the macroeconomic situation continues to deteriorate, and the geopolitical situation has not changed, but now everybody is used to working with these problems. In contrast, other economies, such as Brazil, Turkey, South Africa and China, face new challenges that investors have not yet taken on board.

The behavior of stock markets and foreign exchange rates is determined by many factors. On the one hand, there is a direct correlation with global events. For example, the US Federal Reserve rate hike will most likely lead to an outflow of capital from emerging markets. On the other, we see counter-intuitive trends. It would seem that the anti-terrorist operation in Syria would be a deterrent. But any event, even the worst one, has beneficiaries. So oil prices rose against the backdrop of the military action in November, and they directly correlate with the ruble. The horrific terror attacks in Paris and elsewhere raised the prospect of Russia and the West forming a coalition against terrorism. This news had a positive impact on the stock market. Even falling oil prices in December were less damaging to the ruble than to the currencies of other emerging markets.

Another factor is the declining significance of long-term issues that once profoundly affected markets. The ‘new normal’ becomes the accepted business environment. For example, events in Ukraine are no longer harmful to the Russian market. This story is long over.

In 2016, energy prices will remain the key factor influencing many emerging markets. The trend will be impacted by the Fed’s decision on US rates. According to our forecasts, the cost of oil will average about $47 per barrel for the year, so there is little prospect of severe volatility of the ruble and a strong rise in prices.

Geopolitics is extremely important for Russia, particularly the potential easing of sanctions. This would give serious impetus to development: first of all, it would open international capital markets. There are also important roles for the Russian Central Bank’s rate and monetary policy, tax periods and liquidity and inflation. We expect further rate cuts. These are good signals for the economy and credit, but mean a reduction in the overall capacity for financial markets.

Today it is difficult to say how geopolitics, the slowdown of the Chinese economy, or the situation with shale oil will affect markets. It is difficult to predict how the situation with Iran will be resolved: there are many opinions, but the analysts’ forecasts go in all directions.

In any case, 2016 is expected to be much calmer than the previous year for the foreign exchange and stock markets in Russia. There is no expectation of strong growth, but a positive dynamic should be maintained. Investors may be advised to diversify their portfolios and to select a number of tools in different markets, as well as analyzing the current situation, at least in terms of existing credit and market risks.

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