High oil, China demand. The equity-market outlook continues to look very favorable. Oil is trading significantly above the level assumed in the budget, investors are rebuilding Russia exposure, Chinese demand is boosting metals & mineral prices, and assets are inexpensive. Our year-end RTS target gives 28% upside, and the market is on course to regain its record May 2008 high (60% upside) by mid-2011.

When to switch drivers. The best-performing themes in 2010 thus far have been those exposed to Chinese commodity demand and industries involved in restructuring. Oil & gas has lagged badly, as have many domestic themes. The issue for investors is when to switch from global to domestic themes (certainly by the middle of this year on current evidence).

Investors have been wary of Russia risk. Russia is not over-owned by international investors, leaving plenty of scope for emerging-market investors to add more Russia exposure. Economic improvement is expected to be much stronger in 2H10 and into 2011, and the ruble is not expected to weaken.

Double-digit earnings growth expected. 2010-11 earnings growth in Russia is expected to be stronger than the emerging-market average. However, not all sectors are cheap; oil & gas and banks remain to peers on a two-year view.

Oil price critical. The main risk to the strength of economic recovery in Russia and investors’ perception of risk/reward is the oil price. Chinese demand for metals and minerals is also crucial, as is the pace of global economic recovery. Russia will remain a high-beta theme within global markets in 2010-11.

Russia relies on global demand. The main domestic risk is that the externally driven headline macro recovery does not extend to domestic sectors. Lending rates need to fall, lending volumes need to rise, and inflation needs to be contained.

When to switch from metals to domestics. The metals & mining sector has been a very strong performer on the back of Chinese demand. This is an increasing risk, especially if supply increases due to the re-opening of idled capacity. The main market driver in the latter months of this year and into 2011 will be themes with greater exposure to the recovering domestic economy.

Restructuring themes to continue. The restructuring industries, i.e. regional telecoms and electricity utilities, have also been strong, but still have plenty of scope for price growth.

Oil & gas has little merit. Oil & gas shares have lagged the market badly. But, globally, the industry is lowly rated, and Russia’s companies are not cheap by comparison. Banks are also very expensive relative to developing-market peers.