economy and an escalation of the situation is also not yet our base case scenario (see Econ section). near-term uncertainty has
increased. The situation is noticeably more severe for FX than local bonds.
RUB: Our recently published EM FX Scorecard shows RUB as the fourth attractive EM currency. RUB benefits particularly from
attractive long-term valuation (DBeer fair value for USDRUB at 54.6). but also robust growth momentum, now lighter positioning and
high real rates. Further, the hawkish stance of the CBR provides additional protection. Last but not least, even our short-term valuation
model implies the fair-value somewhat lower (66.65). Although the residuals are not yet at extreme levels, all our models point
towards an overshooting in price action during the recent selloff.
Local bonds: The local curve aggressively bear-flattened in recent weeks with 3Y-5Y bonds trading back above 8.0%. Overall,
valuation looks attractive. Despite the upcoming increase in price pressure further fuelled by the FX weakness, we see limit risk of any
interest rate hike anytime soon. This said. the market is now pricing rate hikes back into the curve. While the local curve (IRS vs
Mosprime) is pricing 60bp of hikes until end-year, the XCCY swap curve is back to unchanged interest rates by year-end, the most
hawkish pricing since early April. Further, foreign holdings are back to the lowest level since Q2-17 and upcoming supply dynamics
are reasonably favourable.
Our long-tens fair-value model for 10Y local bonds based on a) inflation, b) oil. c) short-end rates implies 10Y local bonds closer to
7.25% vs the current level of 8.30 (see chart). This said, term-premium on the curve remains low with a spread of only 10bp between
Feb-24 and May-34. While we preferred long-end bonds so far, we now see more value in the belly of the curve.
Figure 5 Our short-term financial valuation model implies that FX overshot during the recent selloff. .., however, the
actual dislocation is relative to the long - term fair value
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CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0089421
CONFIDENTIAL SDNY GM_00235805
EFTA01387224