2009 Macroeconomics Forecast

This year has, to say the very least, been extremely challenging for the Russian market. After strong gains through to May, the market began to fall in June, accelerated in August, and followed global markets by falling sharply in the past three months. However, we still believe that the market has potential. It is the cheapest major market in global emerging markets. We expect that it will bounce when global growth turns and has the additional driver of the oil price, which could surprise on the upside. For global emerging markets funds Russia is too big to be ignored, the growth potential of companies is still superb, the government has the resources to avoid a disaster and we retain a positive long-term view.

However, the market must overcome three hurdles: ruble depreciation; the turn in global growth; and the economic fragility of Eastern Europe. The way in which these play out will determine the course of the market in 2009, and until they are all resolved, we believe that the market may not have put the problems of this autumn behind it.

In the short term, any significant movement in the currency could provide opportunities. Exporters will benefit from any major depreciation, as this would both remove the principal overhang facing the market today and dramatically improve the terms of trade for exporters. However, investors should note that history would suggest that it is best to play such moves in currency after the event, not before.

Studies of deep US recessions suggest that markets do not trough until the real economy sees some improvement. While hope springs eternal — and the Russian market will continue to trade as a leveraged player on hopes for global growth — this driver may continue to disappoint in 2009, leading to a series of bear-market rallies.

On the plus side, there are various wild cards that could cause the market to double in 2009: the return of inflation; geopolitical conflict or OPEC driving up the oil price; the success of the massive global stimulus packages; or dollar weakness.

However, there are also plenty of tail risks in 2009, from global political unrest to protectionism to geopolitical strife on Russia's borders, as well as corporate governance and bankruptcy risk in Russia.

We are advising long-term investors to buy the market; short-term investors to trade on global news flow; global emerging market investors to overweight the market and play Russian pair trades against global peers; and dedicated investors to overweight commodity stocks, especially steel, oil and precious metals.

We will be entering 2009 with far less certainty in markets than we have seen for many years. The rapidity of change in global economic conditions in the final quarter of 2008 has made predictions at this point extremely difficult. Our end-2009 RTS Index target is 1,000. However, there are clearly huge variables surrounding this; a global depression would see the index at 350, while a rapid bounce in global growth would take it back to 1,500.

The Chinese have a curse which says "may you live in interesting times" and the past few months have reminded investors just why it is that "interesting times" may be so terrible. However, it is at times like this that it is easy for investors to give up hope of recovery, but we believe that this would be a mistake.