By Mark Rubinstein, Deputy Head of Research at IFC Metropol
Traditionally, May and June are not the strongest months for the Russian market. In the past four years, only once, in 2008, the market was able to demonstrate growth over this period. But I think that this year will be an “exception” again, and the markets will gain over the next two months.
Strong commodity prices should continue to be a driver for the Russian market, coupled with its relative under-valuation compared to peer markets, further reduction in the Russia-specific risk premiums by investors and accelerating economic recovery in Russia.
Commodities prices, including the oil price, will stay strong in my view, continuingly being supported by the historic-low interest rates, which promote investments in commodities, and increasing demand from both China and the US. We particularly note that the US housing market is becoming a “new” driver for strong commodities prices faster than anticipated. The latest data from the US shows that housing sales are rebounding strongly and price declines have stopped.
In terms of valuations Russian market is cheaper that Chinese and Brazilian markets which trade at 14x and 12x P/E versus 9x for Russia. At the same time earnings of the Russian companies are expected to grow by an average of 45% in 2010.
In addition, international investors will continue to buy into Russian assets over the next two months attracted by high interest rates and strong rouble. This will give the markets further support.
We think that MICEX could gain 5% to 10% over this period to the level above 1550. We recommend investors to play “strong world commodity prices” and “domestic demand recovery themes” in the markets. The top picks for the next two months the shares of PIK, VTB, Sberbank, Lukoil, Raspadskaya, Mechel, Norilsk Nikel, Novatek, IDGC CV, IDGC Holding, INTER RAO, OGK-4, Airflot and Bank St.Petersburg.
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