Angelika Millendorfer, Head of Emerging Markets Equities at Raiffeisen Capital Management.
Russia’s equity market was one of the biggest losers last year. But since the beginning of 2009, it has been one of the top performers even though a strong correction swept the market in June and July. So far prices are up by around 40% for 2009 right now. How do things look going forward?
The Russian economy corrected by more than 10% year on year in the first half of 2009. But one should also note that the price of crude oil, which is by far the most important factor influencing the Russian economy, has recovered significantly from its low of slightly above $30 which was registered in December 2008 . If the price of oil settles in solidly at around $60 to 70 per barrel, it is likely that some growth will be registered in the Russian economy in 2010. Industrial production in June was already a hopeful sign. Another positive factor was the stabilisation of the rouble after its strong devaluation, and the country’s currency reserves of at around USD 400 bn. Companies’ access to credit has improved (in part due to pressure from the state), and interest rates have fallen sharply from their extremely high levels.
Around the turn of the year, share prices on the Russian exchange were pricing in a fairly disastrous scenario for the country´s economy. The steep rises in the value of stocks and the recovery of the rouble seen since then were mainly due to the realisation that such fears had been vastly exaggerated. Above and beyond that, some stocks also began pricing in a robust economic recovery, which is still lacking any hard evidence so far. With all of this in mind, the current correction in share prices can be seen as a healthy development. Over the longer term, Raiffeisen Capital Management views the prospects on the Russian equity market as good overall. In the current situation, however, great attention will have to be placed on the selection of individual names.
Certain oil and gas sector stocks have the best prospects right now, and some consumer-oriented companies also feature attractive valuations. Despite the possibility of short setbacks at any time, crude oil prices should enjoy good support over the longer term, because structural supply-side problems will continue to be an issue, and these problems could even be exacerbated by the current global economic downturn. By contrast, shares in industrial metal producers are currently not so enticing. Moreover, one should exercise caution in the Russian banking sector. Painful defaults on loans can be expected in 2009 and 2010, and it is difficult to grasp the exact scope of the problem. Some steel producers, however, look attractive. Although some producers are currently operating at loss-making levels, many of the Russian low-cost manufacturers are still profitable. These companies may profit particularly strongly from consolidation in the steel market.
Raiffeisen Capital Management (RCM), headquartered in Vienna, is Austria’s largest asset manager with E27 bn. in assets under management (as of June 2009).
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