The Weekly Update

True to recent form, politics continued to command a dominant position throughout the week as the French presidential election is shaping up to be a bit of an odyssey, and it is yet to even get to the first round of voting. Let’s not forget the UK’s ongoing attempt to extricate itself from Europe, along with elections also due in the Netherlands (March) and Germany (September) and discussions over Greece’s terms and size from international lenders for the third installment of emergency loans. Not forgetting Mr. Trump’s recent victory, 2017 is certainly panning out to be a very interesting year!

One country that has certainly benefited from a more benign focus (at least from a bond market perspective) is Russia, where the 5-year CDS has rallied from the extremes of 607 basis points (bps) in 2015 to today’s level of 171. Pre Crimea (but post the 2008 crisis), the spread had touched 120 bps at its tights.

Indeed, recently Moody's Investor Services raised Russia’s outlook to stable from negative adding Russia’s strategy ‘reflects an ambitious fiscal consolidation strategy incorporating conservative spending and revenue assumptions’. Russia’s Economy Minister Maxim Oreshkin, said there are ‘objective grounds’ for a ratings upgrade.

Moody’s cited an improvement in the economy as well as a fiscal consolidation strategy that should help wean the country off its dependence on oil. That means that all three major agencies have now confirmed the economy is stabilising after almost a two year long recession, the longest in almost two decades. The Economy Ministry expects growth to reach 2% in 2017 while its 4% inflation target is also within reach, currently at 4.7%. Steady oil prices, the Russian budget has $40 per barrel built into it, improving mining, agriculture and manufacturing data all are contributing to the improved outlook.

This news has benefited our Russian holdings although there is no sign as yet of an upgrade with Standard and Poor’s and Moody’s retaining their non-investment grade rating; with Fitch the only one of the three that held their BBB- investment grading during Russia’s economic and political problems. By way of an example our holding of Gazprom 8.625% maturing in April 2034, a USD denominated issue, is now priced around 130.75 which is a spread of 311 bps off of the US Treasury curve. If we utilise the Fitch rating, the better of the three agencies, this equates to a price which makes the bond 2.4 credit notches cheap to our fair value spread of 203 bps and offers us a return plus yield of 15.7%. Should this bond trade into its fair value spread it would rally around 15 points in price terms.

Please read this important information before proceeding. It contains legal and regulatory notices relevant to the information on this site.

This website provides information about Stratton Street Capital LLP ("Stratton Street"). Stratton Street is authorised and regulated by the UK's Financial Conduct Authority. The content of this website has been prepared by Stratton Street from its records and is believed to be accurate but we do not accept any liability or responsibility in respect of the information of any views expressed herein. The information, material and content provided in the pages of this website may be changed at any time by us. Information on this website may be out of date and may not be updated or removed.

The website is provided for the main purpose of providing generic information on Stratton Street and on our investment philosophy for the use of financial professionals in the United Kingdom that qualify as Professional Clients or Eligible Counterparties under the rules of the United Kingdom Financial Conduct Authority (the "FCA"). The information in this website is not intended for the use of and should not be relied on by any person who would qualify as a Retail Client. Products and services referred to on this website are offered only at times when, and in jurisdictions where, they may be lawfully offered. The information on this website is not directed to any person in the United States. The provision of the information on this website does not constitute an offer to purchase securities to any person in the United States (other than a professional fiduciary acting for the account of a non-U.S person) or to any U.S. person as such term is defined under the Securities Act of 1933, as amended.

The website is not intended to offer investors the opportunity to invest in any Alternative Investment Fund ("AIF") product. The AIFs managed by Stratton Street are not being marketed in the European Economic Area ("EEA") and any eligible potential investor from the EEA who wishes to obtain information on the AIFs will only be provided with materials upon receipt by Stratton Street of an appropriate reverse solicitation request in accordance with the requirements of the EU Alternative Investment Fund Managers Directive ("AIFMD") and national law in their home jurisdiction. By proceeding you confirm that you are not accessing this website in the context of a potential investment by an EEA investor in the AIFs managed by Stratton Street and that you have read, understood and agree to these terms.

No information contained in this website should be deemed to constitute the provision of financial, investment or other professional advice in any way. The website should not be relied upon as including sufficient information to support any investment decision. If you are in doubt as to the appropriate course of action we recommend that you consult your own independent financial adviser, stockbroker, solicitor, accountant or other professional adviser. Past performance is not necessarily a guide to the future. The value of investments and the income from them may go down as well as up. An application for any investment or service referred to on this site may only be made on the basis of the offer document, key features, prospectus or other applicable terms relating to the specific investment or service.

Where we provide hypertext links to other locations on the Internet, we do so for information purposes only. We are not responsible for the content of any other websites or pages linked to or linking to this website. We have not verified the content of any such websites. Such websites may contain products and services that are not authorised in your jurisdiction. Following links to any other websites or pages shall be at your own risk and we shall not be responsible or liable for any damages or in other way in connection with linking.

By using this site, you should be aware that we may disclose any information that we hold about you to any regulatory authority to which we are subject, or to any person legally empowered to require such information.

This website uses cookies to improve user experience, by clicking the "I Accept" button below means you consent to the use of cookies on our website.