Research Notes
Tactics for November 2009: Market correction... New opportunities?
| 03.11.09 |
The Russian economy is looking up. In September 2009, the pace of Russian GDP contraction slowed to 8.6% y-o-y. Compared to August, GDP rose by 0.5%. Unemployment and loan rates are falling, while high commodity prices and low inflationary pressure ensure favorable conditions for further economic revival. As before, we expect the dynamics of Russian y-o-y GDP growth to turn positive by December 2009.
Markets fear the withdrawal of government support. As the global economic environment improves, more and more governments are moving to wind up economic bailout programs, which could have a negative impact on world capital markers and slow down global economic recuperation. Concerns over the cancellation of government bailout measures, coupled with Russian equities outperforming EM peers and high current market valuations (P/E 2010 = 12.6) could favor a mid-term corrective trend on the Russian market. We reiterate our baseline RTS index target 2009 at 1,200 points.
Our long-term view is still positive. Despite the outrunning YTD growth, the Russian market is still the cheapest among the BRICs on a forward-looking P/E ratio, and the majority of Russian companies trade at a discount to global peers. In addition, the emerging upward trends in the global economy could incur higher inflationary risks, which, coupled with investors’ urge to diversify USD-denominated assets, could create additional demand on commodity markets and serve as a long-term upside driver for Russian equities.
Redistribution of liquidity will stimulate demand for small-caps. The record fund inflow during the past few months has mainly been lodged in blue chips. We believe that inflows will be gradually redistributed to second-tier names, which are far more undervalued and recommend that investors pay special attention to the biggest potential beneficiaries of the Russian economic revival, such as Vozrozhdenie Bank, Mostotrest, Sollers and NCSP.
Fixed-line telecoms reform opens up a number of investment opportunities. We expect that the reform of the fixed-line telecom industry will remain a hot issue in the short-term. Preference shareholders of Rostelecom are likely to be the key beneficiaries in the future merger. Preference shares of the cheapest interregional telecoms, Dalsvyaz and Volgatelecom, also provide interesting investment opportunities
Expected transition to RAB should increase demand for electric grid names. In view of the need to finance their large-scale investment programs, the FGC and some interregional distribution grid companies are expected to switch to RAB in 2010, which should have a positive impact mainly on FGC and MRSK Holding stock valuations.
Bond market. In view of the upward trends emerging in the Russian economy and the favorable climate on the money markets, we recommend investing in first-tier ruble bonds with a maturity of less than two years, and single out VTB 24-1, VTB 24-4 and Rossekhozbank-4.
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