In our January issue of Stratonomics (17 Jan 2012) we highlighted that all MSCI Russia sector indices except for consumer staples are trading at a discount to MSCI EM peers. In our latest strategy piece (see The Chance of a Lunchtime, 10 Feb 2012) we outlined that investors’ greater appetite for risk of late should benefit EM equities and be especially supportive for the beaten-down CEEMEA region. South Africa, last year’s best performer in CEEMEA, in our view is structurally a defensive market and hence should be less attractive to investors given the current higher risk tolerance. We therefore expect some funds to rotate out of South Africa with either Russia or Turkey as their destination. Turkey has rallied 23.6% YtD vs a 19.4% rise in Russia. While our current recommendation on Russia is largely a momentum call (and fundamentals arguably may take a back seat in such a climate), we note that Turkey faces headwinds from a deceleration in economic growth from 7.2% last year to 2.7% in 2012E, based on Bloomberg consensus. Furthermore, Turkey is trading on par with its long-term average 12M fwd P/E and a 4.9% discount to the EM average. On a sector-neutral 12M fwd P/E Turkey’s discount to EM contracts to a mere 1.9%. Meanwhile, Russia currently trades at a full 42.7% discount to the EM aggregate on 12M fwd P/E and a 16.5% discount on sector-neutral P/E, underscoring our view of Russia’s relative attractiveness during the current ‘risk-on’ trade.
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