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Russian stocks, boosted by stabilizing economy, may surprise: Analysts

Russia ETF sees big bullish turnaround
Russia ETF sees big bullish turnaround

After being pinned down by the weight of international sanctions against Russia's economy, the country's stocks are on a tear, a move that analysts say may have some legs.

Russian equities have enjoyed a major rally this year, with the Moscow Exchange index recently hitting an all-time high, and the popular Russia-tracking exchange traded fund (ETF) RSX surging over 27 percent.

However, even after a great few months, some say Russian stocks still have a ways to go to make up for lost ground.

Sergey Aleksashenko of the Brookings Institute, formerly deputy chairman of the Central Bank of Russia and former chairman of Merrill Lynch Russia, told CNBC that in 2015, the Russian market was "oversold as many anticipated the collapse of the economy."

However, as the situation stabilized, the "market is looking to regain," he wrote in an email. Russia's economy, which contracted by nearly 4 percent last year, is in the midst of a tentative recovery, and the International Monetary Fund expects another recession this year.

However, oil—the linchpin of Russia's energy-reliant economy, has remained above $30, a factor that Aleksashenko expects will be supportive of growth.

'Gas station masquerading as a country'

The Central Bank of Russia in June cut interest rates by 0.5 percentage points as inflation remained steady despite an anticipated acceleration. In a June report, the central bank stated the Russian economy was at that time facing a more favorable situation than was previously anticipated, citing a slowing in gross domestic product decline and signs of economic recovery.

The cut in interest rates—from 11 percent to 10.50 percent—came as the central bank observed more confidence in the economy, "allowing for further expectations of a sustainable inflation reduction" to a 4 percent target next year.

For some, the central problem remains that Russia's growth is heavily reliant on its massive oil and gas exports.

"Russia, still, like John McCain said, is basically a gas station masquerading as a country," said Boris Schlossberg, managing director of FX Strategy at BK Asset Management. He referred to the Arizona Republican senator's comments about Russia in a 2014 interview.

Schlossberg said overall the "tone" of the Russian economy is going to improve from fundamental and currency perspectives, given that political relations with the West, though still problematic, have thawed somewhat. That could help Russian industrial companies recover, he said.

"Now that they've come through the crisis, and now that you can sort of make an assumption that oil prices are not going to go back down to $20, they have a floor against which they can operate," Schlossberg said. "Therefore they have some breathing room."

Though gains have been made, there may be a long road ahead, particularly headed into a 2018 election, when President Vladimir Putin's current term ends.

The Russian economy began to falter in the second half of 2014, and signs of recovery toward the end of 2015 were not long lasting, according to Brookings' Aleksashenko

According to his February report, "Should Vladimir Putin be concerned about the Russian economy?," the analyst said the quality of Russia's economy was "much worse" than the crisis of 2008. That gives pause to some other analysts.

"I don't think it's a runaway story; it's obviously heavily hinged to oil prices," said Tim Seymour, managing partner at Triogem Asset Management, who believes the gains in Russia's stocks and economy are sustainable.

And Seymour believes the recent interest rate cuts here will help strengthen the economy.

"I think you've seen some firming in the industrial numbers," Seymour told CNBC's "Trading Nation" recently.

'The Google of Russia'

A truck drives past pump jacks north of Ufa, Bashkortostan, Russia.
Sergei Karpukhin | Reuters

Seymour recommends buying Russian mobile company Mobil'nye Telesistemy, noting its attractive dividend yield (about 7 percent). Technology company Yondex, is also a good buy here, said Seymour, calling it the "Google of Russia."

The Russian ruble has fallen nearly 23 percent from its highs in late January, first dipping below the dollar in March and continuing a general decline into August.

"I think the currency is actually cheap on a PPP basis," said Seymour, referring to the purchasing power parity of the Russian ruble. The PPP is the amount that different countries' exchange rates must adjust in order for the exchange rate to equal each currency's purchasing power.