Research Notes
Strategy for 2009: A challenging year to come
| 30.12.08 |
We expect global economic conditions to remain complex in 2009 and it is quite likely that the world economy will slide into recession. The global financial crisis has sharply restricted access to credit resources, bringing about sharp cuts in consumer and investment expenditure. In the fallout from the rapid contraction of credit markets and downward correction in world resource prices, the Russian economy saw massive capital outflows and liquidity shortfalls, which has sparked off an acute non-payment crisis.
The start of 2009 will be difficult for the Russian economy. Under our basic scenario, Russian GDP growth will be negative in 1Q 2009, as compared with the same quarter of 2008. The further course of events will be determined by trends on world energy markets and the effectiveness of the measures taken by monetary authorities to overcome the crisis. Our basic scenario envisions average Brent oil prices in 2009 at USD 52 per/bbl, which would put state budget income under pressure. However Russia’s foreign currency reserves, the world’s third largest, which give the government a wide choice of anti-crisis measures, combined with currency devaluation, should allow GDP to grow at 1.5% in real terms.
The state may come to play a greater role in the corporate sector in 2009. However, we are not inclined to dramatize this trend, regarding it as a natural and unavoidable process in the face of the global crisis. Moreover, until recently, the state had mostly created value for minority shareholders rather than destroyed it.
It is expected that the market will continue to react emotionally to changes in macroeconomic conditions, which will stoke heightened volatility on exchanges. Notwithstanding complex economic conditions, and the record risk premium for investors in Russia in the past seven years, we believe that the market will gain in value towards the end of 2009. According to our estimates, the RTS index will end 2009 in the range of 624-1169, while our basic scenario envisages the RTS index at around 893 points towards the end of 2009.
For the time being, most Russian companies look undervalued in comparison with their foreign peers, as is evidenced by the fact that the 2009 P/E ratio for the RTS index is below 6.5, whereas the average relevant multiple for other BRIC countries is about 10. Our favorite companies for 2009 are divided into three groups, depending on estimated risks in the wake of the financial crisis:
- Conservative investors are advised to opt for liquid shares in the oil & gas and telecoms sectors.
- Mid-risk investors should give preference to leading companies in the consumer sector, state banks and cost-efficient metal companies.
- High-risk investors could turn their attention to some of the companies in utilities, machinery and coal mining which could be of interest in terms of potential returns on investment.
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