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Russian equities reached their highest level in more than seven months on bets Vladimir Putin’s return to the presidency will extend a rally in the developing world’s cheapest stocks.
The 30-stock Micex Index added 1.1 percent to 1,625.74 at the close in Moscow, its strongest since Aug. 3. OAO GMK Norilsk Nickel (GMKN), the country’s largest miner, increased 0.9 percent. State-owned VTB Group (VTBR), Russia’s second-biggest lender, rose 1.4 percent. The dollar-denominated RTS Index climbed 1.5 percent to 1,752.17, the most since Aug. 5.
Putin won 63.8 percent of the vote, according to preliminary results from the Central Electoral Commission with 99.3 percent of ballots received. The Micex (INDEXCF), trading at the lowest valuation among 21 emerging markets tracked by Bloomberg, has climbed 16 percent this year, beating gains in Chinese and Indian stocks as oil jumped and protests following Dec. 4’s allegedly fraudulent parliamentary elections were peaceful.
“Above all else, investors like the certainty,” Julian Rimmer, a trader of Russian shares at CF Global Trading in London, said by e-mail. “Consensus opines that a wall of money has been sidelined, awaiting the outcome of the election before being commited to the market.”
The win is an endorsement of Putin’s pledge during the campaign to continue with a plan to privatize state companies and undertake political reform, according to Mattias Westman, managing director of London-based Prosperity Capital Management, which has about $5 billion of Russian assets under management. Westman was in the crowd at Moscow’s central Manezhnaya Square after exit poll results giving Putin victory in the first round were released.
“It’s clear that Putin has broad and deep support and that should be a comfort to markets,” he said from Moscow yesterday. “We’re hoping this election will lead to accelerated reforms and that should be good for state-controlled companies.”
The victory gives the former KGB officer a six-year term in the job he ceded to protege Dmitry Medvedev in 2008 after eight years because of a limit on serving more than two consecutive terms.
Medvedev ordered a review of guilty verdicts against Mikhail Khodorkovsky, once Russia’s wealthiest man, the Kremlin press service said today in an e-mailed statement. Prosecutor General Yuri Chaika has until April 1 to complete the review of cases against Khodorkovsky, 48, and his business partner Platon Lebedev, the statement said.
The Bloomberg Russia-U.S. 14 Index (RUS14BN) of Russian companies listed in New York slid 10 percent in December, the most for two months, as protesters took to the streets of Russian cities against election results that saw Putin’s United Russia party win a reduced majority in the Duma amid allegations of voter intimidation and ballot-box stuffing.
The Micex slipped 6.5 percent in the last month of 2011 and capital outflows from Russia more than doubled last year to $84.2 billion, central bank data show.
“We will see a lot more funds flow into Russia as we now have six years of predictability,” Hawk Sunshine, who manages $300 million of assets at brokerage IFC Metropol, said by phone from Moscow yesterday. “What makes investors worry is that the players in the game would change and that’s not going to happen in Russia. We could see a big rally on Monday because of the relief.”
Since Putin, 59, became acting president on Dec. 31, 1999, replacing Boris Yeltsin the year after the country defaulted on $40 billion of domestic debt, the Micex has returned more than 950 percent to investors, about eight times earnings on the MSCI Emerging Markets index, according to data compiled by Bloomberg. Russia’s per-capita gross domestic product quintupled to $12,000 between 2000 and 2011, according to Citigroup Inc.
The RTS may rise to 2,500 by the end of the year should the government under a Putin presidency implement “radical reform” such as fresh Duma elections, the removal of privileges for favored companies, and reduce its reliance on oil revenues, Kingsmill Bond, chief strategist at Citigroup in Moscow, said in a Feb. 27 research note.
“Incremental reform” would push the RTS to 2,000, while a crackdown on protesters and the media amid rising government spending could drag the RTS down to 1,500, Bond said.
While more than 3,000 vote violations had been registered Russia-wide by 6:40 p.m. in Moscow yesterday, according to state-run newswire RIA Novosti, the Central Electoral Commission said it identified three major “errors” in vote conduct that won’t affect the outcome. Second-place winner Communist Party leader Gennady Zyuganov has rejected the exit poll results and said yesterday he would not recognize the election outcome as legitimate. Zyuganov got 17.19 percent in the vote, according to the Central Electoral Commission.
The “legitimacy deficit” that now plagues Putin after December’s allegedly fraudulent Duma elections and the way his intention to return to the presidency was handled will present a “chronic problem” for the regime in his third term, said Ian Hague, who manages Russian equities as a partner at Firebird Asset Management LLC in New York. Hague said he is avoiding shares of government-run companies such as natural gas monopoly OAO Gazprom.
“The more unpopular he becomes due to factors beyond his control -- such as the oil price, for instance -- the more difficult it will be for his government to exercise power and implement policies,” Hague said by e-mail yesterday. “This will further complicate efforts to achieve balanced economic growth and to address Russia’s significant structural economic problems.”
Oil and natural gas sales contributed almost 50 percent of government revenue last year, according to official estimates, and Russia, the world’s biggest energy exporter, is viewed as the most corrupt major economy, according to Transparency International’s 2011 Corruption Perceptions Index.
“My overall take on Putin 3.0 is that it will be a much more difficult and problematic term in office for him,” said Hague, who founded Firebird in 1994 to buy shares in Russian companies that were privatized after the collapse of the Soviet Union. “The Russian people have become tired of the lack of choices available to them in their political lives and this disaffection is likely to grow.”
The Micex trades at the cheapest valuation of 21 emerging markets tracked by Bloomberg because of the “lack of political and financial transparency,” Alec Young, an international equity strategist at Standard & Poor’s Financial Services LLC, said by phone in New York yesterday. “Both political and corporate transparency will improve over the longer term in Russia.”
The 30-stock Micex trades at 6.3 times analysts’ earnings estimates for member companies, the most expensive level since August. Russian stocks are cheaper than Hungary’s (BUX) at 9.5 times, Turkey (XU100) at 9.6, and Brazil at 11.
Returning 16 percent this year, the Micex is beating gains of 12 percent in China’s Shanghai Composite Index and 14 percent for India’s BSE Sensex Index. Only Brazil’s Bovespa offers higher returns among the biggest emerging nations in 2012, at 19 percent.
A Putin victory is good for equities that have chief shareholders closely associated with the incoming president, Metropol’s Sunshine said. It will also bolster utility stocks as it paves the way for an increase in tariffs, he said.
Putin’s win is also “good for Gazprom because you buy Russia, you buy Gazprom,” Sunshine said.
Gazprom, the world’s biggest natural-gas producer and Russia’s largest company, jumped 0.6 percent to 196.81 rubles, poised for its highest level since Aug. 2.
Among the “cheapest stocks in the whole universe,” revenue of state-controlled Gazprom may be used to fund some of Putin’s election promises, said Young at Standard & Poor’s Financial Services.
Putin vowed to boost pensions and salaries for state workers and the military during campaigning and has pledged to increase government spending by as much as 4.8 trillion rubles ($164 billion), or 5 percent of economic output, through 2018, according to estimates by Capital Economics Ltd. Putin, who has sought to cultivate a tough-man image during his reign by riding a horse shirtless and shooting a Siberian tiger with a tranquilizer, also pledged to reverse “repressive” state policies and reduce government stakes in companies like OAO Rosneft (ROSN), the biggest oil producer.
Rosneft advanced 1.3 percent to 227.79 rubles in Moscow. VTB Group rose 1.3 percent to 7.39 kopeks, its strongest close since Nov. 8, and OAO Sberbank (SBER), the country’s biggest lender, added 0.7 percent to 102.27 rubles, a seven-month high.
Net inflows into Russian stock funds reached $110 million in the week ended Feb. 29, bringing the total for 2012 to $701 million, Cameron Brandt, director of research at Cambridge, Massachusetts-based data firm EPFR Global, said on March 2.
Oil for April delivery was little changed at $106.71 a barrel in electronic trading on the New York Mercantile Exchange today. Futures sank 2 percent to $106.70 a barrel on March 2, taking the weekly decline to 2.8 percent, the first weekly loss since Feb. 3. Urals crude, Russia’s chief export blend and biggest export earner, slid 0.8 percent today to $122. Prices for the oil blend closed at $125.26 on March 1, a 3 1/2-year high.
“We got the best of both for an external investor, political continuance, the development of a sustainable political situation and the awakening of an opposition movement,” Ian McCall, a managing partner at Quesnell Capital SA, an emerging-markets investment adviser in Geneva that manages 100 million Swiss francs ($108 million) including Russian assets, said by phone from Geneva yesterday. “Reform is in the air, but it won’t jeopardize the political situation in the country.”
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