The Russian Federation First Mercantile Fund lost 4.7% in the 1st Quarter of 2017

The Russian Federation first Mercantile Fund (“RFFMF”) gave up some of the strong 2016 profits (+69%) in the first quarter. The price of oil dropped 7% while the ruble continues to strengthen and gained nearly 9%.  Investors took some profits and Russian stocks lost single digits during the quarter.

Valuations remain at a 50% discount (P/E) vs Emerging Markets in general and 65% discount to the World stock markets despite an impressive dividend yield of 5%.

Russian economic growth has started accelerating after two years of recession.  The GDP in the 4th quarter 2016 was up 0.3% and some sectors of the Russian economy saw significantly higher GDP growth rates.

The production and distribution of electricity, gas and water saw annual growth rates of 2.6% while the agriculture sector saw 3.6%.  The annual growth rate of Russian GDP in the first quarter of 2017 may be in the range of 0.4-0.7%, according to the Bank of Russia commentary.  So growth is picking up while we see benign inflation data, with the latest CPI numbers of 4.3% against 5.4% in December 2016.  On top of this we saw gold and forex reserves rise by 5.2% in the first quarter to 399 billion USD and real wages grew with 1.3% in February.

These economic data leads us to believe that we may see the potential of reducing the key rate in the first half of

  1. After the correction in the market in the first quarter, coupled with strong economic data and the continued deep discount
    to peers, Russian equities look attractive.

Source: Bloomberg

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