Research Notes
Tactics for December 2009 Christmas rally may be postponed
| 04.12.09 |
Economic recovery in Russia slows down. Contrary to our expectations, the pace of economic recovery in Russia has slowed down. In October 2009, both Russian GDP and industrial production decline exceeded our estimates and September results. The unemployment rate rose in October, for the first time in eight months, while November was marked by increasing inflationary pressure.
Investor interest in Russian assets waned in November. The RTS showed the worst performance of all the BRIC equity benchmarks in the month of November. The outflow from Russian funds and a gradual contraction in trading volumes were further confirmation that investors’ interest in Russian equities had dropped. By late November, daily trading volumes had more than halved from their 2009 peaks.
Christmas rally is in question. The Russian market has added almost 120% YTD, the best performance among the world’s largest equity markets. The current weighted average forward-looking P/E for the Russian market is 60% higher than the historical value: at such a price level, the country’s stock market no longer looks so cheap. In view of a probable local fall in investor demand for Russian securities, we do not forecast any discernible trends to arise in December and have doubts about any Christmas or New Year rally.
Equity market growth to renew in 2010. Risks related to the weakening of the US dollar and the growth of inflationary pressure are only going to augment in 2010, which should encourage investors to further diversify their assets and the Russian market should definitely benefit from this process. In addition, the Russian market, valued at a 24-41% discount to other BRIC markets, still remains the cheapest of all the four BRICs in terms of forward-looking multiples, and the bulk of Russian companies trade at a discount to their foreign peers.
Telecoms still look an appealing short-term investment opportunity. The ratios at which shares of regional telecom operators will be swapped for those of Rostelecom may be announced before the end of December, which could stir up investor interest in Russian fixed-line names. As before, we recommend investors stake on the preferred shares of Rostelecom and the cheapest preferred shares of regional telecoms – Dalsvyaz.
From the second tier universe, we highlight base metal producers. Stocks of small and medium-cap base metal producers have dramatically underperformed metal prices. Shares of Chelyabinsk Zinc Plant and Uralelektromed seem to us to be appealing investments, both from a fundamental standpoint, and as a promising short-term bet on a catch-up play to metal prices.
Bond market. In our opinion, a local surge in yields on Russian bonds caused by the sudden problems at the Dubai World investment fund offers good opportunities. In view of the substantial strengthening of the Russian national currency, we recommend investing in first-tier Eurobonds, and single out Edel Capital and VTB-15-1.
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