Stock Market Tends towards Bear Undertone
// Yet, private investors should better wait for more certainty
Most experts keep being not very optimistic about Russia’s stock market. However, no one expects drastic downfalls. Even pessimists predict consolidation at somewhat lower levels than the current ones. Apprehensions about the possible fall are due to the non-residents’ leaving the Russian market. Hopes for growth are linked to the fact that the foreign investors raise prices at the world’s stock and oil market. In these conditions, private investors should better wait before making any decisions, and see which way the Russian stock market goes after all.
Outer Problems
Experts’ pessimism about the nearest future of Russia’s stock market is mainly due to the actions of Western players. The analysts who give the darkest forecasts say that the foreign investors leave the Russian market because of fundamental, that is long-term, political factors.
“Russia’s market remains the weakest among the developing stock markets of the world,” said Alexander Potavin, head of Antanta-Kapital investment company’s analytical department for retail clients. “I believe the reason for it can be found in the foreign and domestic policy of the Russian authorities. Obvious cooldown in Russia’s relations with the U.S. and several European countries, tax cavils against Russneft, the revival of an old conflict with the Bank of New York, -- all that does not add optimism to large foreign investors in regard to Russian assets. That is why a number of large U.S. investment banks reconsidered their attitude to leading Russian shares and to the country’s stock market in general, changing it towards bear sentiments. Consequently, we see an unceasing outflow of Western funds from Russia’s equity market.”
However, it is too early to speak of panic yet. There rather is more or less (depending on the expert) deep concern over the non-residents’ leave. Meanwhile, growth of quotations at Western stock exchanges and high oil prices add optimism to the players of Russia’s market. Yet, it is a very careful sort of optimism.
Head of Renaissance-Online company’s broker operations department Denis Filippov said: “On the whole, we will not see drastic changes at the Russian stock market by late May. It will remain within the downwards margin. Among positive factors, there are high oil prices and good climate at the world’s stock markets. At the same time, even the market’s support based on the oil prices growth is at the expense of Russia’s funds. Western funds, on the contrary, have been drawing money out of the Russian market. That is why it becomes quite sensitive to such negative factors as, for instance, the fall in liquidity at the end of the month due to tax payments. Besides, there is danger of correction in the West after the period of growth. So, the players are so far more inclined to sell than to buy.
Alexander Potavin names the same factors of risk, but he gives more drastic estimations: “Only a favorable outer background at the international stock and raw materials markets keeps investors from a new wave of sales of Russian assets. Traders do not have the motive yet for beginning to speculate for the fall. At most, we will have a period of consolidation in the range of 1820-1870 points of the RTS index. However, Russia’s market is becoming more vulnerable to a possible downward correction, due to a weaker inflow of important economic news from the U.S. recently, and to the fact that it is becoming harder and harder for the Western markets to grow. Thus, near the mark of 1870 points of the RTS index we advise to our clients to reduce their positions in shares and to go into cash. We should also keep in mind it is late May now, and the season of vacations is coming up. Market liquidity in this period usually reduces, and investors weakly react to positive inner corporate events. The main wish of portfolio managers at a weak market is to watch it.”
The camp of moderate optimists is represented by Anatoly Kaplin, director of Interfin Kapital management company’s analytical department. The expert thinks the negative scenario is quite likely to happen, but does not believe the fall of quotations might be drastic. “I do not expect considerable growth at the stock market in the course of next week,” he said. “If there is a falling trend, it will lead to the strengthening of demand for shares and the return of prices to the level of 1850 points of the RTS index. Besides, the market has a serious level of support at the mark of 1800 RTS points. Optimistic expectations are due to the high prices on oil. If their level exceeds the upper margin of the $60-70 per barrel corridor, it will make Western investors, who have been quietly drawing funds out of Russia’s market in the course of last month, radically re-evaluate their attitude to Russia.
Head of Uralsib company’s information and analytical department Alexander Golovtsov believes in the potential of the Russian market more than all other interviewed experts. “The market will soon recover after the nine-percent fall in May’s first half,” he said. “Four factors speak in favor of growth: record levels of monetary liquidity, the end of VTB’s IPO that drew funds off the market, the positive climate at world markets, and the eight-month peak of oil prices. If all basic factors are positive, sooner or later they will prevail. Moreover, we should take into account the technical upward rebound after the correction: the market has already played back the 3 percent of the bottom level.”
However, Golovtsov does not believe that oil prices will grow: “Oil prices growth is based on short-term factors, some disruptions in the work of U.S. oil refineries. On the other hand, there now is a considerable free amount of extracting facilities, the OPEC has significant deposits, unlike in 2006. Besides, traders have a large amount of long-term investments open, that is everyone has already bought oil, and it will be hard for prices to grow more.”
There are two important details in the experts’ comments this week. First, they speak of pretty much the same major processes affecting the market. Second, even the directly opposite opinions remain quite moderate, and no one expects drastic fluctuations of stock market indexes.
It means the number of factors able to significantly affect the stock market is limited to a small circle. Otherwise, both ‘pessimists’ and ‘optimists’ would find extra arguments to support their points of view. It also means the factors neutralize each other, since they are both positive and negative, and the experts cannot guess which trend will eventually prevail.
At the same time, we shall see soon which factor is stronger: sideways trends at local markets do not last forever, just like bull trends at world markets. Portfolio investors do not draw money out of markets for a long period of time if the markets do not fall (thinking, “something is wrong in our pattern”); oil will either exceed the level of $70 per barrel or not, etc.
Thus, private investors should better wait and see where the actions of large players lead, and then join the ‘winners’. They should not fear to be too late: all the above-mentioned factors are at least medium-term.
Inner Decisions
If the record amounts of ruble liquidity just soften the consequences of non-residents’ leaving at the stock market, they actively facilitate the influx of domestic borrowers, especially corporate ones, at the market of ruble bonds.
The primary market rallied in early May, when the level of weekly offering of corporate instruments doubled: from 5-7 to 14.5 billion rubles. Then followed a little fall: corporate issuers offered new shares for just 11.6 billion rubles a week ago. The record sum of 21.3 billion rubles of corporate debt is expected to come to the market next week.
Issuers are forced to actively offer not just by the positive climate. Many companies held annual meetings in April-May, discussing the necessity of borrowed funds, among other issues. This necessity is growing for Russian companies, and not just the large ones.
There is no bright leader among the offerings of the upcoming period. Even the shares of Pervy Ipotechny Agent AIZhK cannot play this role. First, the amount of offering is just 3 billion rubles. Second, the 32-year-long duration might scare investors away. Yet, AIZhK claims the real duration will be about 3.5 years. Anyway, the paper is too atypical for the market from the viewpoint of its planning terms. Especially in the sphere of housing construction. By the way, Brezhnev also promised “a separate apartment to each family by 2000” back in 1980. Communists always had very high-speed national projects, but it did not help that one. Nevertheless, using mortgage and bond mechanisms might break the national traditions.
Short-term papers look more attractive for the market players so far. Adekta management company’s director Alexander Strogalev said: “Initial offerings of Sportmaster and Bahetle are of interest. Sportmaster will use up to 60 percent of attracted funds to financing its expansion into regions, including the project for creating hypermarkets, and optimizing logistics. The rest will be used for settling the short-term debt. The preliminary landmark of equitable return is 10.1-10.3 percent of annual interest to the offer in 1.5 years. Bahetle plans to direct half of attracted funds to acquiring and building real estate objects, and the second half to refinancing the debt. The preliminary landmark is 11.30-11.85 percent of annual interest.
Papers of longer term might also be in demand with investors. Trader of Moscow Credit Bank Alexander Kholaev said: “Most interesting are the first offerings of Obyedinennye Konditery and Sportmaster. Obyedinennye Konditery are leaders in their sector, and the holding’s financial state allows to predict that portfolio investors will be interested in its shares. We estimate the equitable return for this share at about 8.30-8.50 percent of annual interest to the 3-year offer. Sportmaster is also a leader in its sector, and is characterized by low debt load. The absence of consolidated accounts permits us to suppose that its equitable return of the offering is about 10.30-10.50 percent of annual interest to the offer in 1.5 years.”
Petr Rushailo, Pavel Chuvilyaev
All the Article in Russian as of May 23, 2007
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