Harsh winter, devaluation of the currency, protests.
No, not the UK.
We are referencing the chronic devaluation of the rouble and subsequent civil strife that is occurring in Russia. As Bloomberg reports:
Feb. 2 (Bloomberg) — The ruble slumped to its weakest level against the dollar in 11 years as investors speculated Russia will be forced to give up its currency defense after draining reserves.
The ruble lost as much as 1.7 percent to 36.3550 per dollar, nearing the weakest end of a trading range widened by the central bank less than two weeks ago. Bank Rossii Chairman Sergey Ignatiev pledged on Jan. 22 to use reserves to keep the currency at a level of 41 against a basket of dollars and euros, which translated to 36 per dollar. Based on current euro-dollar rates, the ruble would need to fall to 36.45 per dollar to break the band, according to Merrill Lynch & Co. A central bank spokesman declined to comment.
“The pace of the move to the target is definitely going to be a source of concern to the central bank,” said Martin Blum, head of emerging-market economics and currency strategy at UniCredit SpA in Vienna. “Global risk appetite is continuing to deteriorate so the pressures on the ruble will continue.”
This follows a weekend’s worth of protests, where Russians across the country took to the streets to demand high-level government resignations for the mismanagement of the economic crisis. The protests come after Prime Minister Vladimir Putin openly blamed the current global dollar-based reserve system for the world’s economic travails.
It is fair to say the situation with the rouble is now getting critical, with the government’s attempts to defend the currency becoming increasingly futile. The impact on equities is obvious say Alfa Bank for one – valuations are becoming pointless in the framework. As the bank, which has only just reinstated relative stock picks, explains:
The elephant remains in the room; DCF valuations still pointless: As noted last October, in this environment all long-term, DCF-based target prices remain nearly useless for stock-picking purposes. Investors’ focus, rather, should be on the near term, including closely scrutinizing the debt side of the capital structure and asking pointed questions about solvency and potential bankruptcy. Only once those questions are answered can valuations be considered, and even then investors should focus more on near-term, multiples-based drivers and metrics.
Key inputs remain highly uncertain: In October of last year we noted that DCF values had become detached from reality because practically every major model input – GDP growth rates, commodity prices, inflation, exchange rates, output levels, etc. – had themselves become highly uncertain. As the global financial crisis has only deepened in the interim, it remains foolhardy at this point to try to predict where all of those inputs will settle and, on the basis of that, determine a long-term DCF value.
Related links:
Putin’s shrinking reserves – FT Alphaville
Rubble of roubles – FT Alphaville