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Western Standards
The last few weeks have shown that the market for Russian stocks is simply doomed to growth. And they'll help it overseas. To be more exact, the new financial policy of the United States Federal Reserve Board will help.
For quite a while, at least since the beginning of fall, market experts have been saying that Russian stocks are “overbought.” Their arguments are rather convincing. Just look at the fact that the ratio between profit and capitalization in many Russian companies is sometimes lower than in comparable Western companies. When you consider our traditional problems acknowledging the sanctity of private property rights and with the independence and effectiveness of the court system, you reach the unavoidable conclusion that Russian stocks should come down in price.
Nonetheless, the RTS index has been rising almost nonstop for the last three months, breaking records after record, and we are forced to admit that the talk about Russian stocks being “overbought” is not incontrovertible. The issues may be completely different. The shortcomings of our market just mentioned are certainly taken into consideration by investors. But the huge potential of Russian companies is as well. In a country that receives so much money from oil that its economy cannot absorb it, business just has to grow by leaps and bounds. Maybe not production. But trade and the service industry for sure. If that is so, then Russian stock is a very attractive investment. According to the A.T. Kearney consulting company, which surveyed the managers of the world's largest companies, Russia ranks as the sixth most attractive country for investment, and for good reason.
General tendencies on world markets are favorable for investing in stock too. Last week, this point was made very clearly. On November 13, a rare situation was seen. After the latest decision (the 13th in a row) by the U.S. Federal Reserve Board to raise the discount rate by 25 base points to 4.25 percent per annum, prices on the stock market also unexpectedly rose. This is illogical at first glance. Raising the interest makes money more expensive, slows the growth of the economy and should theoretically have a negative effect on the stock market. But in this case, investors paid attention not to the fact of the rate hike, but to (everybody was expecting that), but to the comments of the reserve board chairman.
Instead of the usual words about more moderate growth of the interest rate in the future, market players heard a few words about a tightening of the monetary policy and made the conclusion that the ear of the rising interest rate was reaching its end. Most analysts agreed that the board would raise the rate a couple more times by another 25 points and that would be it. That is good news for stock markets, especially developing ones, which investors leave first when interest rates go up.
Thus the stock of Russian issuers will continue to grow. In expectation of an injection of Western money, it makes sense to start buying stock now. It's another matter that the growth will not affect all stocks evenly. Stock process now are far from low, so it makes sense to invest only in stock that has potential connected with high oil prices. That is clearly not stock in oil companies. The rising prices for crude oil directly effect their stock quotations and have almost certainly been taken into account already by investors.
So what is left? A lot has been said lately about the consumer sector. Of course, the success of Pyaterochka supermarkets, which made half a billion dollars on its initial public offering, is impressive. Even though they have been saying so on the market for a long time, the growth potential in this sphere seems far from exhausted. And the service industry is not just retail. Events at the beginning of the month whipped up interest in the financial sector again. First, Deutsche Bank announced on December 5 that it had reached a final agreement on increasing its share in the United Finance Group from 40 percent to 100 percent. (The value of that deal was not disclosed.) On the next day, the board of directors of Gazprombank suggested to its stockholders that it sell a third of its stock to Dresdner Bank. Under a preliminary agreement, the Germans will invest $800 million for the supplemental issue. The sum is astounding, of course. So was the calm reaction of analysts to the announcement of it. Commentary was reserved and the deal was taken as at market price.
Of course, Gazprombank, one of Russia's largest banks and should not come cheap. But it is still not a monster of the Svyazinvest type. Now recall that a 25-percent share in Svyazinvest went for the comparable sum of $1.25 billion in 1997. At that time, the massive deal was accompanied by an oligarch's war that led eventually to a considerable shuffle in the government and the sum was called unprecedented and really was a record for privatization for a long time. Now billions of dollars for Russian assets is nothing out of the ordinary.
In addition, another reason to buy stock in companies in the banking sector was provided last week by Russian President Vladimir Putin. On December 14, at a meeting in Novosibirsk, he said (as quoted by Prime TASS) “I would like to confirm that the administration agrees with the banking community that branches of foreign banks and their activity in the Russian Federation should be limited today and, essentially, it should be prohibited. This is also connected with the need to fight terrorism.” So foreign bankers who wish to service growing Russian businesses will have to buy up local banks.
Petr Rushailo
All the Article in Russian as of Dec. 19, 2005
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