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State Companies Threaten the Stock Market
The Russian stock market, which has attained capitalization of $1.1 trillion, may soon face a major correction. Alfa Bank specialists say that the RTS index may fall to 1700 points (from its current 1862). Then it will pick up again. Other experts say that growth will be slower next year, with the greatest strides to be made in the consumer sector, crediting and major investing in infrastructure.
Consolidation of Russian enterprises and record number and volume of IPOs for Russia (Renaissance Capital expects 41 worth a total of more than $31 billion) will have a positive influence. Russia's weight on international indexes will grow. In 2004, Russia accounted for only 3 percent of the MSCI emerging markets index. That indicator will hit 12.5 percent by 2008, behind only Taiwan and South Korea. Alfa Bank analysts says the underevaluated companies of the second echelon will play an important role in that process. The fair value of Russia companies is about 20 percent higher than their current levels.
The greatest risks are tied to oil prices. All economic prognoses are based on the assumption that they will not go lower than $55-60 per barrel. Another danger is the scale of investment in infrastructure. “There is no doubt that investment in extremely important so that the infrastructure is capable of supporting economic growth,” commented Renaissance Capital research head Ronald Nash. “But there are risks involved.” Next year, because of investment increases and social obligations, expenditures from the federal budget will reach 17.5 percent of the GDP (that indicator has been 16.3 percent in recent years) and that will have an undoubted effect on inflation. If the government cannot maintain investment and keep inflation down, economic growth and the stock market may experience a slowdown.
Most researchers and investors have underestimated the risked of the pre-election year, say Aton analysts. They predict that the RTS index will grow next year only to about 1970 points, that is, 6-7 percent. Even if the change of power goes completely peacefully in 2007 and 2008, there will be significant personnel changes in the government and on the boards of directors of the large state companies, which will unavoidable increase volatility on the market. At present, the state share in the value of the 20 largest Russian companies traded on the RTS is 39 percent (up from 10.8 percent three years ago). That indicates high dependency of the stock market on state corporations and intrigues among their leadership will increase dramatically.
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All the Article in Russian as of Dec. 19, 2006
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