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Stocks Withdraw for a Technical Break
// Russia’s stock market needs a respite before New Year rally, analysts say
Russian stocks will stop growing and perhaps will go down in the short term, market analysts say. With no significant events in the next week the market’s behavior is going to be determined by technical factors which show that the growth potential has almost been exhausted.
Retreating
The end of the liquidity crunch on global financial market has improved the mood of investors and analysts on the Russian stock market. Investment firm Olma’s Anton Startsev was most upbeat of all the experts that Kommersant contacted.
“Fewer fears of a possible influence of credit problems on the U.S. economic growth restored investors’ optimism about stocks on various markets including those in developing countries,” he said. “As a result, the RTS index reached a new historic high, which can be interpreted as the start of a new stage of the Russian market growth. If external factors remain favorable, the RTS index is likely to continue its growth.”
However, Mr. Startsev mentioned: “Still, as the month is nearing the end, the market’s growth is slowing down. On October 30 and 31 the U.S. Federal Reserve System’s open markets committee are meeting for a session, and investors may cut transactions ahead of it.”
Other experts sounded more pessimistic about the outlook of the Russian stock market. They said that the period of uninterrupted growth should finally give way to a side movement or even correction.
Andrey Zokin, investment director at Gazprombank Asset Management, said: “I expect consolidation on the Russian stock market in the next few days. The past two months saw a considerable growth of quotations, and investors need a break to get used to new price levels. But in the long term, the situation is auspicious. Global markets picked up, and the Federal Reserve System continues to calm investors. No drastic changes should be expected on the Russian market either. There is no risk of the worsening of the political situation; macroeconomic indicators are good with a budget surplus, high oil prices and moderate inflation. The break may last up to one month if there is no force majeure situation on the global market such as the bankruptcy of a mortgage fund or a fund of funds which are now publishing their balance sheets.”
“The Russian market is currently locally overbought. The top mark of the long-term upward trend is at 2,164 points of the RTS index which has recently been reached,” said Stanislav Sviridov, head of the financial markets analysis department at Svyaz-bank. “The recent weeks’ buoyant growth is likely to open a consolidation or a small local correction of 3 to 5 percent.”
“Despite the fact that all blue chips except Surgutneftegaz were on a rise in the past few weeks, a correction is highly probable as the market is strongly overbought,” said Sergey Sotnikov, leading specialist at NOMOS-bank’s financial markets operations department. “Therefore, the RTS index may even go up to 2,200 or 2,210 points to slip later to 2,100 points. The New Year rally is likely to start from this point. We now recommend holding blue chips but being ready to sell the securities at any moment to buy them back cheaper in the correction.”
Adjustments for Discrepancies
Asked about what upcoming events an investor should pay attention to, experts point to international ones. “We could note new data on housing construction and the Consumer Price Index in the United States which is expected on October 17. The statistics are likely to help investors evaluate the impact of the mortgage crisis on the U.S. economy. On October 17 the so-called Beige Book is released to give a survey on the state of economy in specific states two weeks before the session of the Federal Reserve Systems’ open markets committee,” said Anton Startsev.
Stanislav Sviridov advises to pay attention to this release. “If it is clear that the inflation is growing fast, it will mean that the U.S. Reserve System has fewer opportunities to cut interest rates,” he explained. “The report of Feds’ banks in the Beige Book will help evaluate risks of the U.S. economic slowdown.” He also recommends paying attention to a speech of the Reserve System’s head Ben Bernanke on October 19 which may bring important statements. Both Anton Startsev and Stanislav Sviridov speak about these events as important in the view of the upcoming session of the Federal Reserve System and the market’s attempts market to predict its results.
Probably that is why Sergey Sotnikov says that “the next week is not going to see any event that could be called crucial for the market’s behavior. The dynamics of securities will be primarily determined by technical factors.”
Andrey Zokin agrees with this point of view. He also does not expect “anything unexpected or serious” from the American statistics. But he notes that “investors could use the publication of this data as an occasion for bull or bear speculation.
Point Settings
Despite the general depression on the market, experts point to several Russian issuers whose securities could reach more than average results. According to Anton Startsev, oil and gas blue chips could perform better than the market on the whole as their quotations have been lagging behind the oil price growth. “The stock index of the OLMA-oil&gas added 6 percent this year while Brent rose 25 percent,” the expert said.
Stanislav Sviridov believes that “the ferrous metallurgy appears to be locally overbought while the oil sector is oversold”. He notes, however, that record-high oil prices and a time lag between oil prices growth and a rise on export duties will ensure that balance sheets of oil companies for the third quarter will be very good. He also recommends paying attention to securities of landline communications who appear to be largely undervalued at the background of strong financial indicators. But the analyst admits that investing in them is still fraught with risks due the uncertain future of Svyazinvest.
Andrey Zokin points to telecoms such as mobile operators MTS and VimpelCom which see “better financial indicators and business growth which beats analysts’ expectations”. Andrey Zokin also notes that the sector is expecting M&A deals with smaller companies being taken over by bigger firms. He also advises to look at banks as “potential of their growth rose after investors calmed down, and some of them are going public at the end of the year.”
Sergey Sotnikov suggests private investors pay attention to outsiders: “We may mention securities of Surgutneftegaz and UES of Russia. Their behavior is contrasting with the general situation on the market. Surgutneftegaz has recently gone down, signaling that these securities should be bought right now. Stocks of UES are now a long-term investment. Their success is expected because of cost of the stake which is being received after reorganization is going to be much higher than current prices for UES stocks. They are not likely to be fit for speculation games, and if the stocks were bought after the closing of the register, they qualify for the offer, so they should be better sold.”
Staking on the Offer
The ruble bonds market also presents opportunities for investors. The first-tier is seeing a mild rally that most analysts attribute to the return of nonresidents to the Russian market. But IPOs are still scarce, and this week has seen only one by Khanty-Mansiysk Stroiresurs.
Ivan Guminov, leading portfolio manager at NOMOS-bank commented: “The issuer derives broad political support from regional authorities, so the stocks have a serious credit quality. The fair yield on it would be 11.5 percent per annum. But judging from the market situation we could say that stock will be floated with a premium to make the yield total about 13 percent per annum.”
Alexey Stepanenko, deputy head of the market research department at East Capital, said: “We consider the placement interesting. Despite the unstable condition of the debt market and a relatively weak financial portfolio of the issuer and the warrantor, it is attractive because of a strong shareholder, the state-run Khanty-Mansiysky private pension fund which provided a good letter for the placed loan. The warrant’s rate between 13 and 14 would be quite adequate to make up for risks.”
While other issuers are preparing for IPOs, investors capitalize on the continuing refinancing through offers on the market. When almost the whole volume of the issue is presented for an early repayment, issuers sometimes have to make diplomatic miracles to persuade investors to take the stocks back. Premiums for loyalty with this kind of secondary placement normally average 1 to 1.5 percent per annum for a warrant of even major issuers with high international rating.
Ivan Guminov explained: “When offers and placements overlap, investors will start present issues to be repaid to gain liquidity for games on the primary market. Issuers will have to offer an even bigger premium if they want to refinance issues by an offer.
Alexander Tashintsev, portfolio manager at Finam Obligatsionny, said: “Refinancing through the offer will remain popular. Many companies still find it easier to increase yield on securities rather than receive them for repayment. This practice is quite typical when markets are unstable and cash-strapped.”
Pyotr Rushailo and Pavel Chuvilyaev
All the Article in Russian as of Oct. 17, 2007
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