Research Notes
Strategy for 4Q 2008: Investing under pressure from risk of global recession
| 07.10.08 |
The third quarter of 2008 brought unprecedented losses to the Russian stock market, which saw about half its value wiped out during the period. The confluence of negative factors, including unfavorable trends in the financial sector (the shrinkage of credit markets), a downward correction on world commodity markets, the military conflict in the Caucasus and the growing risk of tighter state control over some sectors of the economy sent the Russian stock indices tumbling to levels not seen since late 2005.
We believe that the lingering destabilization in the banking sector and the further shrinkage of credit markets pose the main threat to the economy. In fact, the real economy is not showing any evident signs of slowing down in fundamental terms and everything will now hinge on the measures taken by monetary authorities, both in Russia and around the world, to shore up the financial sector. In the current environment, we recommend that investors focus on highly-profitable companies with low leverage and a stable business model, and which are better protected from volatility on international markets. The focus on companies geared towards meeting domestic demand remains urgent.
Our estimates show that notwithstanding the current negative trends in the financial sector, the Russian stock market remains unjustifiably undervalued in fundamental terms, which is evidenced by the fact that the P/E 2008 multiple of the MSCI Russia index is now at a level of 6, while the relevant average ratio for the other BRIC countries hovers above a level of 10. Our all-round valuation model for the RTS index shows that its fair value should be in the region of 2,142. However, continuing weakness on world financial markets could prevent the index from realizing its growth potential, at least until the end of this year. According to our estimates, the value of the RTS index will range between 1,176 and 1,763 at the year-end. Under our basic scenario, the index will hover around 1,500 basis points towards the year-end. In our model portfolios, we give preference to shares of Russia’s largest cellular operator MTS, Russia’s leading savings bank Sberbank, the nation’s largest dairy producer Wimm-Bill-Dann, Russia’s gas monopoly company Gazprom, the largest private oil & gas producer Lukoil and the world’s leading potash fertilizer supplier Uralkali. We also turn investor attention to the shares of Russia’s biggest silver miner Polymetal, which could be valuable as a hedge against negative tendencies in the global economy.
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