Research Notes
Strategy for 2Q 2009: Still time to be careful
| 06.04.09 |
Hopes rally. In March 2009, the Russian stock market rallied more than 25%, and the RTS outperformed the benchmarks of most developed and large emerging economies. Meanwhile, real economic indicators were depressing in 2M 2009: GDP dropped 8%, and industrial manufacturing fell by almost 15%.
Recession is unavoidable, but uncertainty has eased. In 2009, the Russian economy will not be able to escape recession; we project that GDP will shrink by 3% in our baseline scenario. Although the extent of the economic contraction in 2M 2009 has outpaced our expectations, the emerging clarity as to the scale of the problem has given hope to the market.
Bad news is still to come. Despite the specific steps announced and taken by monetary authorities in developed countries, the situation in the global financial sector is still far from normal. Even if all of the announced measures are successfully implemented, the sector is unlikely to revive before 2010. Until then, the real sector of the economy will suffer due to weak demand and lack of debt financing.
The market does not look cheap. After the March 2009 rally, the Russian market does not look cheap: the 2009 P/E ratio is 8. Additionally, given the fact that consensus forecasts for most companies are still overestimated, the market’s actual P/E most likely exceeds 10. Therefore, a market downturn in the upcoming months is quite possible.
Upside remains. We note, however, that the market’s crisis-period P/E ratio is not very informative, and Russian companies may demonstrate one of the strongest profit potentials as the global economy revives. Therefore, we have upgraded our baseline 2009 forecast for the RTS index by 5% to 930 points.
Bet on the 2Ls. As long as unfavourable economic conditions remain, we recommend betting on the Leading companies in the sectors. Liquidity is another important factor. Since the country-risk is still high, most investors are expected to stay with high-liquidity first-tier securities.
Pay attention to solid second-tier stocks. As the economy stabilizes and sovereign risks diminish, the market should focus more on second-tier shares, which could privide tripple-digit returns in the next few years. As for less liquid issuers, we recommend paying attention to companies with a strong market share and healthy financial position.
We do not expect a significant decrease in yields on the bond market. We recommend that preference be given to bond issues with less than two years maturity. Preference should be given to Eurobonds. For ruble bonds we recommend a currency hedging strategy.
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