Analysts advise investors to turn their attention to the bond market which is recovering after a lengthy slump with new offers.
Photo: Alexey Kudenko
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Time to Slow Down
// Experts say Russia’s stock market should have a correction after a buoyant growth
The Russian stock market has already exhausted its short-term growth potential or is getting close to it, analysts say as they expect a correction early next week. In these circumstances investors probably should turn their attention to the bond market which is recovering after a lengthy slump with new offers. What is more, private investors will be able to buy them at a reasonable price.
Results of Acceleration
Speaking about the current situation on the Russian stock market experts mainly point to its buoyant growth in the past few weeks. However, experience shows that a lofty growth is followed by correction. Almost all experts contacted by Kommersant believe that it is high time for the Russian market to slow down.
“The market had an upbeat mood at the start of this week,” says Khalil Shekhmametyev, chief of Otkrytie’s analytical department. “The auspicious situation on global financial markets had its share as well as Gazprom’s good balance sheet for quarter one released on Monday. Profit fixation is due to start in the next couple of days. We estimate that the Russian market will reach some 2,070 points in the RTS index at the start of the next week.”
“The RTS index has added some 17 percent in the past seven days without any significant correction,” says Pavel Krapchitov, managing director of MDM Asset Management. “That’s why we could expect the market to stop growing or even go down next week.”
Alfa Bank’s analyst Angelika Henkel notes that there are not only technical but also fundamental factors that foresee the correction. ‘The first week of the month which is believed to be traditionally unfavorable for stock markets is over,” she says. “October does not bring any psychological weight for the Russian stock market. Stock indices grow an average 2.8 percent this month. This October, the largest part of the indicated growth, 2.1 percent, has already been achieved. The RTS index is less than 2 percent away from hitting 2,150 points at the end of the year, according to Alfa Bank’s prognosis. With numerous scenarios for developments two seem to be the likeliest. They are a downward movement and ensuing growth or, on the contrary, a growth and correction. The first scenario is backed by a possibility of problems with liquidity on the domestic market as Russian economic agents are due to do 90 billion rubles tax payments on October 15 while the Finance Ministry floats securities for 6 billion rubles on October 17.
Nikolay Podlevskikh, head of Tserikh Capital Management, is more optimistic but he also advises investors to be cautious. “The behavior of indices on our market is closely linked to the behavior of Gazprom stocks,” he believes. “After the first quarter balance sheet was released, these securities got a chance to approach summer’s all-time high of 294.2 rubles per stock. This looks an achievable goal after last week’s steep rise. However, the market still has no good reasons to beat all these records straight off. Even dealing with such upbeat stocks as Gazprom’s I would recommend to fix profits at the current level to resume buying either in case of reaching the indicated level or after a more probable slump in prices and correction.”
Alarming Symptoms
Persistent uncertainty on global stock markets could also be an additional stimulus to fixing profits on the Russian market as well as unclear prospects on the return of nonresidents’ money withdrawn from Russia in the liquidity crunch.
Tensions on foreign markets persist, making markets sensitive to new macroeconomic data which could give the full picture of the situation in leading economies. Final data on the U.S. GDP for the second quarter is due next week as well as reports on the Producer Price Index and Consumer Price Index. In addition, several American issuers are to present their year-on reports. Market players will keep a close eye on this news and will take them into account to forecast further moves of American, EU and British interest rates. The U.S. Federal Reserve System’s Open Markets Committee convenes for a session quite soon - on October 30 and 31. Global markets have neared their all-time highs, so unexpected information may influence stock indices. They are still set to grow but a lot of investors keep their fingers on the sell button. We believe that the period between October 10 and 16 is most likely to be marked with selling.”
“Risks of withdrawing money from international funds aimed at Russian and CIS markets are still high,” said Angela Henkel. “The latest data still indicates nonresidents’ cautious attitudes towards the Russian market. In the week ending on October 3, $1.4 billion was invested into global emerging markets funds. BRIC funds raised $435 million in the same period, Russia received as little as $26 million of them.”
“In my opinion, the stock market will be largely influenced by new U.S. economic data next week,” says Pavel Krapchitov. “At this moment, new data are believed to have little difference from that of last year. But as stock indices have reached all-time highs, any negative piece of news may send the market down.”
In this quite tense situation experts advise investors against taking risks and buying Russian securities at record-high levels. They believe that second-tier stocks have more potential. Khalil Shekhmametyev also advises to stay clear of oil and gas stocks as prices corrections on raw materials markets are likely due to off-season. The car and hurricane seasons are over but the heating season has not started yet.
However, those wary of extra risks have just got ruble bonds as a good alternative to investing in stocks.
Inflow Zone
The liquidity level on the ruble market has grown while interbank rates fell to 6 percent and do not want to go higher. The Russian Central Banks acts as the major source of fresh liquidity with its injections into the currency market. The Central Bank’s interventions exceed $2.5 billion on some days and do not fall below $1.5 billion. As a result, the volume of direct repo transactions from the Central Bank fell from 150-200 billion rubles a day last week to 50 billion rubles this one. Market watchers, however, disbelieve a drastic change of weather and give cautiously optimistic comments.
“Despite some improvements with liquidity, the situation on the ruble bond market is still difficult,” says Alexander Ermak, director of the analytical research department at Region. “A positive trend is still forming. It is too early to say that the market has turned around. There are doubts about positive dynamics as the level of liquidity is now lower than it usually is at the start of the month while rates at the interbank market are higher than usual. Much will depend on the Federal Reserve System’s session on October 30 and 31 when it will become known whether the policy of cutting rates on the world market will persists. Demand on securities is not systematic now. Investors only buy what they have confidence, and they also pay attention to guarantees.”
Pavel Bilenko, Planeta Kapital’s vice-president, says that the situation on the ruble liquidity market is improving. “But a trend on the ruble debt market has not formed yet,” he notes. “Quotations on Federal Loan Bonds (OFZ) see movements of various directions. Municipal and corporate bonds also move in a side trend. The macroeconomic situation allows portfolio investors to buy bonds on emerging markets, but they simply don’t have money at the moment.”
New Benchmarks
Next week will see 18 billion ruble placements of banks with large state shares. Kommersant has written that these banks need refinance themselves in the fourth quarter. Market watchers are seriously worried whether the Central Bank’s liquidity injections could be just a preparation to help state-owned banks enter the market. In any case, the situation will not turn around since stocks are sure to be floated at new price levels.
“Such big banks as Rosselkhozbank and VTB 24 which do their IPOs next week will be offering the market big premiums,” says Alexey Yu, debt market analyst at Aton. “They are reliable due to a large state presence, so premiums should attract a lot of investors including foreign ones. It is probable that starting from October 10 we will be able to say whether the Russian market is ready for new placements and even for new price levels. We estimate the yield for the two issues at 8.5 percent per annum on the offer.”
“IPOs of VTB 24 and Rosselkhozbank are the most interesting offers on the market,” says Alexander Ermak. “As for Rosselkhozbank’s issues, a balanced yield on them should be less than 8.5 percent. But it is very unlikely to be such at the background of an increased inflation prognosis. VTB 24’s debut issue could have between 8.5 and 9 percent in yield on the offer.”
Pavel Bilenko says he expected large banks with state shares to enter the market first as their debts come together with the highest possible level of safety. “A yield on Rosselkhozbank and VTB 24’s issues won’t exceed 9 percent on the offer” he says. “But it won’t be less that than either.”
Pyotr Rushailo and Pavel Chuvilyaev
All the Article in Russian as of Oct. 10, 2007
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