Russian stock market shows modest results in 2012: Year in Review

MOSCOW. Jan 9 (Interfax) – The Russian stock market gave investors hopes for good profits early on in 2012 but ended up at the rear of global financial flows demonstrating rather modest results. The overall global situation was also certainly far from ideal, but, despite all the European debt troubles, the uncertainty surrounding the U.S. presidential elections and the fiscal cliff fears in the United States, most international stock markets showed considerable growth for the year.

The Russian stock market was the outsider in terms of growth rate among emerging markets, for which Standard & Poor’s compiles S&P/IFCI indices. The Russian S&P/IFCI index growth in 2012 was just 12.3% (fifth from the bottom out of 21 emerging markets stock indices). In the BRIC group (Brazil, Russia, India and China), the Russian market only looked better against the Brazilian market, which climbed 3.3%. The Chinese and Indian stock indicators surged 19.8% and 24.9%, respectively.

Analysts say growth in the Russian stock market could quicken in the coming year.

POSITIVE START TO THE YEAR AMID WAVE OF OIL PRICE GROWTH

Despite the Russian authorities desire to “detach” the domestic economy and financial markets from oil price dynamics, this has not yet been achieved and the Russian stock market’s behavior in 2012 is a clear example of that. The dynamics of the key Russian stock indexes followed the dynamics of black gold quotes, which after reaching highs in the first half of March plunged more than $30 in less than three months, leading to just as deep a plunge on the stock market.

A steady recovery for oil prices in June-July to the levels seen at the start of the year came with a synchronous recovery on the stock market. Starting from August, Urals c.i.f. Mediterranean quotes fluctuated between $105 to $115 per barrel while stock market fluctuations remained
within a lateral trend.

The RTS index climbed 10.5% in 2012 to 1526.98 points and the MICEX rose just 5.2% to 1474.72 points.

At the peak of its growth in March 2012, the RTS index topped 1760 points and the MICEX was close to 1640 points. This was largely due to the rise in international oil prices, which reached highs since July 2008 amid volatility in the Middle East (Urals c.i.f. Mediterranean quotes reached $125 per barrel).

The highs were also encouraged by news of financial aid for Greece. Private creditors also wrote off 53.5% of Greek debts on “old” Greek bonds amid an exchange for new government bonds.

There was a new surge on the Russian stock market after Vladimir Putin’s confident win in the March 4 presidential elections. However, by March 6 the market demonstrated its biggest drop of the past three months when indexes lost around 4% amid a negative backdrop and news from Fitch about risks for the Russian economy following the presidential elections.

DOWNTURN ON INTERNATIONAL MARKETS AND DESIRE TO TAKE PROFITS TRIGGERED DROP IN SHARE PRICES

The Russian market saw a downward trend in the last two and a half weeks of March with dominating sales and profit taking as investors took advantage of the downturn on international capital markets, especially in emerging markets and Europe. Warnings from the International Monetary Fund about the risk of slower economic growth in emerging markets put considerable pressure on markets.

In addition, the World Bank said the Russian economy was recovering more slowly from the 2008 crisis than it did after the 1998 crisis. World Bank analysts attributed the slower recovery to the moderate growth in investment.

Poor statistics in the west, political uncertainty in Europe and Russia and tumbling oil prices following OPEC’s announcement that an oil price of more than $100 per barrel did not suit the cartel due to the associated reduction in demand triggered heavy selling of Russian shares from May.

The Russian stock market saw a peak in decline on May 24 when it expected Greece to come out of the euro zone. The MICEX index dropped to around 1240 points in the first half of the day, its lowest since July 2010. Shares tumbled after the former Greek prime minister Loucas Papadimos said the country’s government was discussing a pull out from the euro zone.

RUSSIAN STOCK MARKET STARTS TO CORRECT UP IN JUNE

After two and a half months of decline the Russian stock market began to correct up in June as players closed short positions in anticipation of a solution to European debt troubles and an easier monetary-financing policy from international central banks. The People’s Bank of China, for example, decided on June 8 to cut 0.25 percentage points off interest rates for the first time since 2008 in order to encourage economic growth.

Later the gains were supported by the results of parliamentary elections in Greece, where the New Democracy Party, a supporter of the deal with the EU and IMF, was victorious, increasing the chances for an operational coalition government.

But market recovery was hard going and at times there were rather strong breakdowns. The RTS index fell 5% on July 23, for example, topping the 3% drop on the MICEX index due to ruble depreciation as international markets and oil prices came down amid fears over Greece, Spain and China.

For most of August and September, the Russian stock market remained within a lateral trend of 1420 to 1460 points on the MICEX, anticipating more action from central banks, especially the U.S. Federal Reserve and the European Central Bank, with regard new measures to stimulate the economy.

QE3 ANNOUNCEMENT TRIGGERS SURGE, BUT RALLY WAS SHORT

International markets, including the Russian market, began to rally after the U.S. Federal Resrve announced its third round of quantitative easing (QE3) involving the purchase of $40 billion per month in mortgage bonds and for the first time the monetary authorities did not limit the total volume of the purchase program. The Fed left interest rates unchanged at 0%-0.25% per annum and their term was extended to mid-2015.

However, after a busy rally on September 14, the next trading day (September 17) saw profit taking, encouraged by a drop in oil prices amid increased crude reserves in the United States.

Oil prices fell when the White House announced that authorities were still considering releasing oil from strategic reserves in order to limit the possible surge in crude prices after the introduction of QE3.

At the end of the third quarter the Russian market fell back on fears that the debt crisis in Europe would worsen, however sales eased locally after Spain adopted its 2013 budget, which included new spending cut measures and a package of reforms.

EUROPEAN DEBT, FISCAL CLIFF IMPACT RUSSIAN STOCK INDEXES AT YEAR-END

The RTS and MICEX indexes plunged toward 1400 points in November amid heavy selling by foreign investors who had lost interest in riskier assets after the U.S. presidential elections. The Barack Obama victory increased fears that the United States would face a fiscal cliff at the start of 2013 – an automatic cut in budget spending and tax breaks of $607 billion (almost 4% of GDP).

Only at the end of November did the market follow international markets up in anticipation of a solution to the fiscal cliff problem and European debt troubles. The U.S. president and Congress leaders decided to start negotiations to achieve an agreement in December.

The market was rather optimistic about a statement made by Russian President Vladimir Putin in his address to the Federal Assembly that starting from 2013 around 100 billion rubles from the National Welfare Fund might be invested in Russian securities.

In the last two weeks of the year the Russian stock market was unable to show any clear trend as gains were contained by the fiscal cliff discussions in the United States.

There was some support for the market from an influx of western capital into funds investing in Russian funds. EPFR reported that investment reached $4.6 million between December 20 and 26 after 11 straight weeks of capital flight.

LEADERS AND OUTSIDERS OF THE YEAR

Consumer sector companies were the growth leaders in terms of industries and the relevant MICEX sector index posted a climb of 27.3% in the year. The engineering sector also did fairly well, climbing 16.9% in the 12 months. The biggest losses were posted by electricity companies because of the government’s cap on tariff hikes and sector structure uncertainty – the MICEX sector index fell 16.8%. Sollers (RTS: SVAV) common shares were the growth leaders on the MICEX-RTS stock index, shooting up 125% in the year. Other growth leaders were Magnit (RTS: MGNT) (up 68%), Protek (up 67%), Transcontainer (59%), Dixi Group (: DIXY) (41%), UTair (RTS: TMAT) (39%), Tatneft (RTS: TATN) (38%), Nomos Bank (RTS: NMOS) (38%), and the preferred shares of Nizhnekamskneftekhim (RTS: NKNC) (50%) and Transneft (RTS: TRNF) (37%).

The biggest losses of 2012 were seen by the common shares of PhosAgro (down 84%), OGK-2 (RTS: OGKB) (54%), IDGC North Caucasus (RTS: MRKK) (48%), Gals Development (48%), TGK-6 (RTS: TGKF) (46%), Razgulay (RTS: GRAZ) (45%), TGK-5″ (RTS: TGKE) (45%), Kvadra (RTS: TGKD) (45%), Raspadskaya (RTS: RASP) (41%) and Mechel preferred shares (41%).

STOCK MARKET TO SEE QUICKER RATE OF GROWTH IN 2013

The Russian stock market could see a faster rate of growth in 2013 with a return of investor interest in riskier assets after a resolution is found to the fiscal cliff and U.S. debt ceiling problem, say market participants polled by Interfax.

The MICEX climbed 5.2% in 2012 and the RTS added 10.5% thanks to ruble appreciation. The indicators showed very modest results compared to other emerging markets (Turkey, for example, surged almost 70%, Egypt nearly 50% and the Philippines 46%). The most cautious forecasts put Russian stock market growth in 2013 at 10%-15%.

Markets will pay very close attention to the fiscal cliff problem over the next few months until they see that the Federal Reserve’s massive asset purchase program (over $1 trillion per year) is the prevailing factor, said Vladimir Rozhankovskiy, the director of the analytical department at Nord Capital. Only after that will market interest wane in U.S. interparty disputes and a real rally on stock markets begin with a wide range of commodity futures contrasting against a weakening dollar.

A balanced investment strategy is recommended for the first quarter of 2013 including the most liquid first-tier shares, shares with high dividend payments and shares from fundamentally undervalued companies in high potential sectors (consumer and telecoms).

Rozhankovskiy selected 9 most appealing shares: Gazprom (RTS: GAZP), Rostelecom (RTS: RTKM), the preferreds of Surgutneftegas (RTS: SNGS), Tatneft (RTS: TATN) and Bashneft (RTS: BANE), the shares of MTS, Megafon (RTS: MEGF), M.Video (RTS: MVID) and Dixi Group (RTS: DIXY). However, because of the accumulation of problems in the global economy there could be a slump in stock markets in the first quarter, in which case the best position will be an absence of positions, that is cash, he said.

Stanislav Kleschev of VTB 24 says 2013 will not be that different from 2012. Economic growth, both globally and for individual countries will remain volatile, provoking frequent mood shifts among investors. A conservative view should be maintained on investments and diversified savings applied. The priority should continue to go to bank deposits (dollar and ruble parity) into which over half of available funds should be placed, he said.

The Russian market will remain undervalued. It was unable to reach its potential in 2012 but there are indications that 2013 will be more successful for stock market investors.

The stock market can demonstrate growth ranging from 1650-1850 points on the MICEX, which means its growth potential is 12%-25% from the current level. However, even this rate of gains will not eliminate the discount in the valuation of Russian company shares against other emerging markets – the best case scenario is that it will be cut in half.

Commodity company shares will remain the most interesting shares (metallurgy, oil and gas) as well as companies oriented toward growing consumer demand (banks, retail and transport). Also of interest are companies paying generous dividends (Bashneft, Tatneft, MTS and Nizhnekamskneftekhim (RTS: NKNC)).

The actions of the government can be a serious catalyst to Russian stock market revaluation by foreign investors, Kleschev says.

Here three key issues can be outlined:
– an increase in dividend payments by government companies (to 25% of net profit, as the government is demanding), which could covert the market into dividend history;

– privatization, which should confirm the course of reducing the government’s role in the economy (confidence in this wavered amid the Rosneft-TNK-BP deal and the presentation of Rosneftegaz as a strategic investor in the fuel and energy sector);

– protection of minority investor rights.