One of the key tasks for Russia equity investors as they head into 2013 is to gauge how the perception of Russia's investment case will react to external events and conditions. While the domestic story remains in place, the perception of how the market will likely react to developments in foreign markets will likely continue to dominate sentiment next year.

One broader question is whether Russia will remain vulnerable to external shocks and continue to be seen by many as a cyclical, high-beta play on events in other markets. Such investors remain skeptical about country-specific factors and have

traditionally allocated to Russia based purely on the global economic cycle. They also still see Russia as a quintessentially high-beta market and, despite some encouraging developments in terms of market infrastructure, remain convinced that it is unlikely to behave any differently now than it did four years ago.

Those who believe otherwise will likely argue that in an era of open-ended QE and stagnant growth in developed economies, investors are likely to devote an increasing share of their global allocations to markets that offer attractive returns at an acceptable level of risk. While Russia has always traded at a discount to EMs largely based on risk perception and structural vulnerabilities, the current discount seems excessive. Hence, the expectation among this group is for Russian equity performance to rebound in 2013 from what has been a frustrating 2012.

We tend to agree with the first group while remaining fully cognizant of arguments made by the second. In general, we believe the Russian equity market in 2013 will increasingly benefit from the trend toward investment in tangible “hard” assets, while also remaining vulnerable to speculative fund flows, country-specific concerns and the vagaries of global risk aversion.

Meanwhile, stock-specific stories, particularly involving dividends and primary placements, will continue to drive many investment decisions, with structural reform playing a secondary but increasingly visible role. In a very real sense, these factors represent the necessary growing pains – acute though temporary – that the Russian market must experience if it is to fulfill its intended role as a conduit for capital flows and shareholder return.

Eoin Treacy's view One can form credible arguments both in favour and against Russian equities discount to other markets but there will inevitably be a number of shares that outperform, not least as potential changes to China's economic policy could spur commodity demand.

Over the last few years, Russian equities have shared a high degree of commonality with WTI oil prices. It is therefore interesting that the RTS Index has rallied over the last few weeks while oil prices have deteriorated. The Index will need to hold above 1690 in order to break the medium-term progression of lower rally highs and suggest more than temporary demand dominance.

West Texas Intermediate continues to hold above $85 and firmed from that area today. A sustained move below it would be required to extend the medium-term downward bias.