Bloomberg News

Stocks May Extend Biggest Decline Since 2008: Russia Overnight

October 03, 2011

Oct. 3 (Bloomberg) -- Russian stocks may extend their biggest quarterly decline since 2008 amid prospects a global recession will stymie the nation’s already slowing economy by cutting demand for commodities, trading in futures shows.

Contracts on Russia’s dollar-denominated RTS index expiring in December dropped 1.9 percent to 129,305 on Sept. 30, as the measure in Moscow slid 3.5 percent, bringing its slump in the three months to Sept. 30 to 30 percent. The 30-stock Micex Index lost 18 percent in the period, the worst quarter for both indexes since the last three months of 2008. The Micex may slip 2.5 percent at the open today, according to Alfa Bank.

The Bloomberg Russia-US 14 Index of Russian companies traded in New York dropped 3.8 percent to 85.74, bringing its quarterly loss to 32 percent as German retail sales in August declined the most in more than four years, fueling concern that the region’s debt crisis is hitting consumer demand in Europe, Russia’s biggest trading partner. Data today may show U.S. factories grew last month at the slowest pace since July 2009, adding to speculation about faltering global growth.

“The markets are driven by this type of uncertainty and fear, a real crisis of some kind approaching,” Mattias Westman, managing director of Prosperity Capital Management, the largest Russia-focused equity investor with about $5 billion under management, said in a phone interview from London on Sept. 30. “People can’t really quantify the risk of something really bad happening. A lot of people just want out.”

Faltering Economy

The International Monetary Fund cut its forecast for global growth for 2011 and 2012 to 4 percent on Sept. 20, reducing previous estimates of 4.3 percent and 4.5 percent respectively. Oil and gas make up 17 percent of Russia’s gross domestic product, which expanded 3.4 percent in the second quarter, the slowest pace since the three months to Sept. 30 2010.

Oil declined 17 percent in the three months to Sept. 30, also the worst quarter since the global financial crisis, which was ignited by the collapse of Lehman Brothers Holdings Inc. in September 2008. Crude for November delivery dropped 3.6 percent to settle at $79.20 a barrel in New York at the end of last week, the lowest settlement since Sept. 29, 2010.

The delay in resolving Europe’s sovereign-debt crisis, which spurred $9.4 trillion to be wiped off global stock markets last quarter, may push the world economy into another economic slump, Josef Ackermann, Deutsche Bank AG’s chief executive officer said last week.

OAO Mechel is Russia’s largest maker of coal for steelmakers and about 19 percent of the company’s 2010 sales were to Europe. Mechel’s American depositary receipts declined 6 percent in New York to $10.19 on Sept. 30, bringing its loss in the third quarter to 57 percent, the most since the last quarter of 2008.

European Delays

“If Europe continues to kick the can down the road, there will be continued pressure on markets such as Russia, until policy makers there deliver some real solutions,” Vlad Milev, a Los Angeles-based analyst at Metzler Payden, which manages $750 million in assets, said in a phone interview on Sept. 30. “Russia is still a good market long term, but there are very few reasons for momentum at this stage.”

Russia’s Finance Minister Alexei Kudrin was ousted last week after refusing to serve in a government under President Dmitry Medvedev because of spending disagreements. Prime Minister Vladimir Putin, who was president from 2000 to 2008, said on Sept. 24 that he’ll swap jobs with Medvedev by running for the presidency again in March elections. Kudrin oversaw Russia’s recovery from its 1998 debt default and presided over budget surpluses through Putin’s presidential term.

Gazprom, Lukoil

American depositary receipts of OAO Gazprom, the world’s biggest natural gas exporter, fell 3.3 percent to $9.55, bringing their loss for the quarter to 34 percent, the most since the last quarter of 2008. Gazprom fell 1.9 percent on the Micex index on Sept. 30 to 156.07 rubles, or the equivalent of $4.83.

OAO Lukoil, Russia’s largest non-state oil producer, fell 2.6 percent in New York to $50.19 for a 21 percent third-quarter loss. Lukoil in Moscow dropped 1.1 percent to 1,637.40 rubles, or the equivalent of $50.64.

CTC Media Inc., a Russian television network, was the biggest decliner on the Bloomberg Russia-US 14 index last quarter, tumbling 58 percent, the most since the last three months of 2008. The stock fell 3.2 percent to $8.90 in New York on Sept. 30 and was downgraded last week to “neutral” from “overweight” at JPMorgan Chase & Co. The Moscow-based company cut its forecast for revenue growth to 15 percent from 20 percent on Sept. 12 because of lower-than-anticipated audience share.

Yandex Tumbles

Yandex NV, the operator of Russia’s most popular Internet search engine, lost 42 percent last quarter. Dow Jones Newswires reported on Sept. 29 that Chief Executive Officer Arkady Volozh told investors that the company had lost ground to Google Inc. Yandex spokesman Ochir Mandzhikov didn’t immediately reply to a phone call and e-mail requesting comment after hours in Moscow on Sept. 30.

Netherlands-registered Yandex, which trades at 38 times analysts’ estimates for its earnings, fell 9.5 percent to $20.46 on Sept. 30, its lowest level since going public on May 24 at $25 a share. The shares sank 20 percent last week.

“In these times, when people are very cautious, that’s an excuse for some rapid selling,” Prosperity Capital’s Westman said. “Yandex has one of the highest valuations in the markets, so it has further to fall.”

‘Open Interest’

Investor unease about Russian equities can be illustrated in the drop in number of RTS futures contracts that were rolled- over to December from those that came due on Sept. 15, according to Luis Saenz, chief executive officer of the U.S. unit of Moscow-based brokerage Otkritie Financial Corp.

The number of contracts in “open interest” has fallen to about 617,000 valued at about $1.6 billion, from more than 1.2 million contracts on Sept. 14 valued at about $3.5 billion, according to Otkritie. Open-interest contracts are both long and short bets on equities that haven’t closed.

The decline is largely due to Russia-based traders exiting the market because price volatility has made it difficult for them to “meet their margin calls,” Saenz said in a phone interview from London, referring to brokers’ demands for cash from investors to cover adverse price movements. The average margin requirement for RTS futures rose to 18 percent over the past two weeks, from 10 percent in early September, he said.

The RTS Volatility Index, which measures expected swings in the index futures, rose the most in a week on Sept. 30, gaining 7.7 percent to 57.27 points. The index more than doubled in the three months to Sept. 30, its biggest advance since the third quarter of 2008.

Metals Fall

The Standard & Poor’s 500 Index declined 2.5 percent to 1,131.42 on Sept. 30, losing 14 percent in the quarter, its worst performance since the last three months of 2008. The Dow Jones Industrial Average lost 2.1 percent to 10,913.38, falling 12 percent in the third quarter.

The Standard & Poor’s GSCI index of 24 raw materials fell 2.6 percent to 591 as commodities recorded their biggest quarterly drop since the end of 2008. Nickel declined 5.7 percent to settle at $17,600 a ton on the London Metal Exchange, while copper for delivery in three months slid 2.2 percent to settle at $7.018 a metric ton. Gold futures gained 0.3 percent to $1,622.3 on the Comex in New York.

Lower Valuations

The Market Vectors Russia ETF, a U.S.-traded fund that holds Russian shares, retreated 6.5 percent to $25.30, down 34 percent last quarter, while the Bank of New York Mellon Russia ADR Index dropped 5.1 percent, for a 36 percent quarterly drop.

The Micex has slipped 19 percent in 2011 and trades at 4.9 times analysts’ earnings estimates for member stocks. That compares with a 25 percent slide for Brazil’s Bovespa index, which trades at 9 times estimated earnings, according to data compiled by Bloomberg. The Shanghai Composite Index trades at 10.9 times estimated earnings, and the BSE India Sensitive Index has a ratio of 13.7.

--Editors: Emma O’Brien, Richard Richtmyer

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To contact the reporter on this story: Leon Lazaroff in New York at llazaroff@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net


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