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Emerging Markets Drift Away from EU, America's Plagues
// Russia’s stock market will give investors a chance to reap profits irrespective of the U.S. Fed’s decision
The behavior of global markets and Russian trading floors are going to be linked this week to the results of an October 31 session of the open markets committee of the U.S. Federal Reserve System which is to pass a decision on interest rates, analysts told Kommersant. They are also unanimous in their recommendations to investors. Irrespective of the decision of U.S. monetary officials, it is advisable to consider securities of the Russian oil and gas sector. Ruble bonds of Russian regions are likely to bring sizeable profits as they become more expensive in election time and before the new year when funds from federal coffers are sent to regional budgets.
Growth with Reservations
Almost all experts say that the main event to influence the Russian stock market short-term-wise will be a session of the U.S. Federal Reserve System’s open markets committee and its decision on new interest rates.
“The key event of the upcoming week is the FRS’s session and a decision on the rates,” says Stanislav Kleshchev, analyst at VTB 24. “The meeting is going to determine short-term trends on global financial markets. Now almost no one doubts that the rates will be cut by 25 points, while the most aggressive minds demand even more and cut the price of borrowings by a further 50 basis points. It seems that the American regulator will not betray hopes of speculators this time and cut the basis rate. It means that we should expect it to bring a new wave of purchases on the Russian stock market which continues to be undervalued and highly attractive for investment even despite the recent growth. Irrespective of the cut (25 or 50 basis points) trading on Thursday will open with a 1 to 2 percent morning gap. The market will be growing in the following two or three days, and then investors will be fixing their profits.”
A similar scenario is forecast by Finam’s asset manager Alexey Butenko: “The market estimates that a 25 basis point rate cut will happen with a 75 percent probability. The markets will largely depend on the Fed’s decision. No events of such scale are expected this week. The market will meet a cut by 25 basis points with optimism. Russian indices should grow by two to four percent on the news. A cut by 50 basis points will push the quotations up to the same level as it will become obvious that this is the last cut from the Feds this year. A 25 basis point cut will leave a room for one more decrease before the end of the year.
Despite the fact that the market overwhelmingly believes in a cut of the U.S. interest rates by 25 basis points, it would be too early to say that American monetary officials will make this decision. The reason is simple. Inflation is one of major macroeconomic factors that the Federal Reserve System is tracking while a cut in rates will almost certainly send consumer prices up. That is probably why some analysts point out to market risks related to a possible refusal of the Feds to cut the interest rate.
Vitaly Karbovsky, head of investment firm Solid’s analytical department, says: “The most important event of the week is a session of the Federal Reserve System which may pass a decision to cut the rate. The move is most likely to increase quotations on global stock markets including the Russian one. But if the rate is left unchanged, it may become a signal for a ‘hold’. Many stock markets gained a lot in the past two or three months. Several Asian trading floors have seen 40 to 50 percent growth. In a situation like this, one signal is often enough to start fixing profits, and the Fed’s decision can become this sort of signal.”
“We believe that in the circumstances we cannot make a firm conclusion on the prospects of the Russian market. The overall undervaluation should foster the growth, but on the other hand, profits fixation on developing markets may fix profits on Russian trading floors as well. Therefore, we give two possible scenarios for this week. If the growth continues, the RTS index will climb to 2,450 points. In case of profits fixation the RTS index will drop to 2,000 points.
Independent Factors
There also other points of view on the degree of influence of the Fed’s policies on the Russian stock market. Renaissance Capital’s analyst Ovanes Oganisyan believes that this factor will play an important but not a crucial role in Russia. “The Russian stock market will be growing next week. Perhaps, it will also get an extra boost from the FRS’s decision, but it will be only an extra boost,” the expert says. “It is emerging markets that show growth. Investors see that the valuations of companies look attractive. They are either cheap or experience a big rise in their revenues. And this is not old investors returning to the market. New funds are flowing in, and one of the reasons is that investors are leaving the dollar. Russia is now witnessing a record-high money inflow from foreign investors. After the market slump in August and early September, $1 billion came from institution investors in September alone, which is much higher than average annual indicators. It looks like investors started to consider emerging markets as a quiet harbor. As far as Russia is concerned, the general growth potential is boosted by raw materials prices. Overall, the behavior of emerging markets becomes increasingly independent from trends on developed markets. For example, our market did not make a big reaction to Merill Lynch’s poor data last week.”
Ovanes Oganisyan advises investors to pay attention to stocks of Gazprom, LUKOIL and Transneft since “they are still cheap and can go up on a possible upgrade of oil prices prognosis. He also recommends cheap stocks of NKMK, VSMPO and Severstal from metallurgy, another raw materials sector.
Anatoly Butenko also advises to keep an eye on raw materials prices and take a closer look at stocks of non-ferrous metallurgy companies. “The behavior of oil prices will also be important for the Russian market as they have already reached historic highs,” he says. “In case the trend continues, I would point out the outlook of Gazprom and LUKOIL stocks due to a growing a disbalance between fuel prices behavior and the cost of companies’ stocks. At the same time, despite the favorable outlook of Russian blue chips of the oil sector I would advise investors with long-term contracts more attention to second-tier stocks in case of an oil prices rise. First-tier stocks have got a quite restricted growth potential. Also, the second tier this year is showing between growth rates than the first tier, and the situation is likely to remain the same. Speaking about specific companies, I would recommend investors considering cheap stocks of fuel and energy firms based in Bashkortostan as well as non-ferrous companies of the second tier such as Yuzhuralnikel, Chelyabinsk Zinc Plant and Polimetall.”
Stanislav Kleshchev says: “Stocks of fuel companies, which are the most attractive for foreign investors, are most likely to be leaders of the growth. I do not rule out that RAO UES stocks may grow to the price of redemption – 32.15 rubles. Another factor in their favor is that the government is meeting for a session on an energy reform on Thursday.”
Budget Option
Russian investors have other options for making money with less dependence on the Federal Reserve System and other external factors. The ruble bond market is now buoyant in anticipation of sizeable spendings of budget money on the eve of the parliamentary election and at the end of the financial year. The liquidity crunch has affected not only corporate bonds but also securities of regions and municipalities as they are now being traded at 98 to 99 percent of the nominal prices. Money injections from the federal budget to region are able to push their quotations up at least to reach the nominal prices since the market will receive firm guarantees of debts repayment.
Apart from regional issues, market players are advised to buy securities of issuers who are closely linked to regional budgets. The pre-election rain of gold from the federal center should have a positive influence on them as well.
Igor Moriy, head of the debt securities department at First Republican Bank, says: “I would recommend private investors buying securities of regional administrations. They have big yields and unlike corporate securities the inflow of budget money to regions will almost certainly boost their quotations in the next two months. Other securities of interest are of those companies that entered the Central Bank’s pawn list and which do not lose their connection with large regions.” Dmitry Chernov, head of RI-Group Finance’s active operations department says: “We would recommend investors bonds of Moscow Region. A high warrant and a price growth potential at the background of stabilization on the debt markets may yield from 12 to 14 percent per annum.”
Yakov Yakovlev, head of the debt market analysis department at bank Zenit, says: “The market’s recovery largely depends on when the Finance Minister decides to allocate money under the announced rise in budget spending and money of ‘institutes of development’. It seems that it will happen in late November or early December. Even if the expected inflow of liquidity will be delayed, a new crisis on the market is not probable. We would recommend investors focusing on undervalued issues of the second tier some of which still bring extremely high yields which appeared in the “sale” in the previous months.” Marianna Tkachenko, portfolio manager of Allianz ROSNO Asset Management, says: “We recommend private investors second- and third-tier bonds. A big number of these securities bring attractive yields, and it’s sensible to buy them without any hurry.”
Pyotr Rushailo and Pavel Chuvilyaev
All the Article in Russian as of Oct. 31, 2007
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