Alger Emerging Markets Outlook

OUTLOOK 3/8

Sanctions and Potential Reforms Highlight Outlook for Russia Russian equity performance disappointed in 2017 after a strong rally at the end of 2016 that resulted from expectations that a new U.S. administration would improve relations with the country. A modest recovery in oil prices also supported the rally. U.S.-Russia relations did not improve significantly and oil price increases in 2017 were concentrated in the second half of the year. Our view on Russian markets for 2018 is uncertain as two major events early in 2018 are likely to define investor interest in the country’s equity market for the remainder of this year and possibly over the longer term. First, the “Countering America’s Adversaries through Sanctions Act” passed in August 2017 required the U.S. Treasury Department to prepare a report before February on the impact of expanding sanctions to include a ban on holding Russian equities or sovereign debt. The deadline passed without the Treasury recommending specific actions, but the department says sanctions are still possible. Investors are concerned about the impact of the potential additional sanctions. It is difficult to handicap the likely direction of the Treasury and this is further complicated by the ongoing investigation by U.S. Special Counsel Robert Mueller. Second, the Russian presidential election scheduled for March is expected to result in the re-election of Vladimir Putin. It would be his final six-year term. GDP growth rebounded from a 0.6% decline in 2016 to an estimated 1.8% gain in 2017, although the expansion has largely been driven by state investments, including infrastructure projects.With Russia’s GDP growth expected to be less than 2%, ambitious reforms are required for President Putin to cement his legacy. He is thought to need a historic mandate in the March election with a minimum 70% voter turnout and at least 70% of the vote to achieve that goal. Among various possibilities, his potential appointment of Herman Gref to head Gazpromwould be viewed favorably. Gref is currently the CEO and chairman of the largest Russian bank, Sberbank, and he previously served as minister of economics and trade. Inflation has been more subdued than anticipated, primarily due to weak consumer demand, lower food prices, and a stronger ruble (See Figure 3). An increase in inflation

GDP growth rebounded from a 0.6% decline in 2016 to an estimated 1.8% gain in 2017, although the expansion has largely been driven by state investments, including infrastructure projects.

(%)

Figure 3 Russia Consumer Price Index

12.9

11.4

data

8.8

6.6

6.5

6.1

5.4

4.0

3.5

2.5

Year-Over-Year Change (%)

2010

2011

2012

2013

2014

2015

2016

2017

2018E

2019E

Source: Bloomberg