* Fund managers were consensus overweight for Russia in
* They hoped for recovery, sanctions repeal, higher oil
* Stocks disappointed as Putin-Trump "bromance" cooled
* Oil prices weakness, rouble strength present more
By Sujata Rao
LONDON, June 15 It seemed the slam-dunk emerging
markets trade of the year - an economy starting to grow after a
two-year funk, rising oil prices, and above all, a friendlier
White House that was expected to lift punitive curbs on
investment and fundraising.
But emerging markets fund managers who bought Russian
equities in January will have seen the MSCI Russia equity index
tumble more than 15 percent in dollar terms since then.
It fell as much as 2 percent at one point on Thursday,
hitting 15-month lows and has fared worse this year than even
Qatar, which is locked in a high-profile spat with its Gulf
Russia's setback is part of a global cooling of 'Trump
trades'. These were mainly based on hopes that President Donald
Trump would boost the U.S. - and global - economy through
But he was also expected to repeal sanctions imposed in 2014
to punish Russia for its role in the Ukraine crisis
. As a result, most foreign investors were
overweight Russia until this month, holding more Russian stocks
than the country's share in the benchmark indexes, according to
data from Renaissance Capital.
This seemed obvious as an apparent "bromance" between Trump
and Russian President Vladimir Putin promised a thaw in
diplomatic ties. But far from lifting sanctions, U.S. lawmakers
this week voted for fresh, stickier, curbs while preventing
Trump from easing existing ones.
"The two theses behind the overweight have both collapsed -
oil prices and Trump," said David Hauner, head of emerging
markets cross-asset strategy at Bank of America Merrill Lynch.
"People were bullish on oil, which turned out to be wrong,
and there were hopes on sanctions relief, which also turned out
to be wrong."
Hauner, among those bullish on Russia in January, advised
clients in March to reduce exposure to the stock market and has
since cut Russian bonds too, citing worries over how heavily
foreigners were positioned in both markets.
Crude futures meanwhile were near six-month lows, despite
repeated supply cuts and price forecasts have fallen each month
in 2017. Oil revenues make up almost half the government budget
revenues while six of the 10 biggest Russian stocks by market
capitalisation are energy firms.
The latest steep losses mean state shipping firm Sovcomflot
- specialising in transporting oil and gas - will delay a
planned share sale which had been planned for this week, a
source told Reuters on Thursday.
On the domestic front, things are looking up. The economy
should grow 1.5 percent in 2017 after two years of contraction
while company earnings have improved.
Russian earnings-per-share (EPS) have on average bounced 27
percent from troughs hit in 2016 and should expand 7-9 percent
in the coming six months, noted Michael Bolliger, head of
emerging market asset allocation at UBS Wealth Management.
"That part of the Russia story is intact," Bolliger said but
admitted the decision to overweight Russian stocks had proved
"painful". "We are having discussions on how to reposition."
Russian bond investments have fared better, earning
dollar-based returns of over 10 percent this year, thanks to a
conservative central bank that has cut interest rates very
slowly. It is expected to ease policy on Friday by 50 basis
points but has pledged to keep rates well above inflation.
But high interest rates have lured record fund inflows into
Russia's domestic bonds, in turn boosting the rouble 8 percent
against the dollar until this week.
That has effectively severed a long-standing correlation
between the currency and oil. So while crude slid 11 percent off
May peaks, the rouble lost 1.2 percent, Christopher Granville,
managing director at consultancy TS Lombard said in a note this
"The rouble's de-coupling from oil compounds the blow for
Russian oil stocks," Granville said, advising clients to
re-focus on domestically oriented sectors such as retail and
avoid energy stocks that face oil price weakness and rouble
(Reporting by Katya Golubkiova and Zlata Garasyuta in Moscow;
graphic by Ritvik Carvalho; editing by Anna Willard)