Bloomberg News

Stock Discount Halving to Troika on Putin Reform Outlook: Russia Overnight

March 05, 2012

Supporters of Vladimir Putin, Russia's prime minister, wave national flags during an election night rally in Moscow, Russia. Photographer: Alexander Zemlianichenko Jr./Bloomberg

Supporters of Vladimir Putin, Russia's prime minister, wave national flags during an election night rally in Moscow, Russia. Photographer: Alexander Zemlianichenko Jr./Bloomberg

Russian equities’ discount to emerging-market stocks will shrink by more than half in the next year as Vladimir Putin works to improve corporate governance and democracy as president, according to Troika Dialog.

Moscow’s Micex Index (INDEXCF) trades at 6.4 times analysts’ earnings estimates for member companies, a 51 percent discount to the MSCI Emerging Markets Index (MXEF), the most since November, data compiled by Bloomberg show. The gap will narrow to as little as 20 percent during 2012, said Ovanes Oganisian, a strategist in Moscow at Troika, Russia’s oldest investment bank, which was acquired last month by OAO Sberbank, the nation’s largest lender.

“The election results will undoubtedly positively affect the foreign investor mood and risk appetite,” Oganisian said in a phone interview from Moscow yesterday. “Putin and those surrounding him will work on making the current political system more stable and support for the democratic power transitions is very important.”

Futures expiring in March on the RTS (RTSI$) Index fell 0.5 percent in U.S. trading to 174,450 after Russian stocks rallied yesterday following Putin’s March 4 victory. The Bloomberg Russia-U.S. 14 Index (RUS14BN) of Russian companies traded in New York dropped for the first time in three days as a lower economic growth target for China boosted concern over a global slowdown.

Russian equities trade at the lowest valuations among 21 emerging markets tracked by Bloomberg, reflecting concern that the country, where almost 50 percent of government revenue stems from energy sales, is too reliant on oil and plagued by corruption. Thousands of protesters rallied in central Moscow’s Pushkin Square yesterday after Putin, currently prime minister, claimed victory in the election that international observers said was unfair. About 250 people were detained.

Protect Business

During Putin’s first stint as president from 2000 to 2008, the Micex returned more than 900 percent. He won the most recent election after vowing to reverse “repressive” state policies and protect private business.

Coal miner OAO Mechel (MTLR) led a 1.2 percent slump in the Bloomberg Russia-US 14 measure yesterday as China cutting its economic growth target sparked concern demand for commodities will slide. The Market Vectors ETF (RSX), a U.S.-traded fund that holds Russian shares, declined 1.6 percent to $33.12.

Homebuilders, retailers, media companies and banks are among stocks that will benefit from Putin’s return to the presidency, Troika’s chief strategist Chris Weafer said in an e- mailed note yesterday. Steel and mining companies may face higher taxes, while resource companies are “less interesting” as their taxes probably won’t be cut, Weafer said.

Rising Volatility

The RTS Volatility Index (RTSVX), which measures expected swings in the index futures, climbed 1 percent to 33.71 points yesterday, the highest level since Jan. 24.

OAO GMK Norilsk Nickel, the world’s largest producer of palladium, fell 1.9 percent to $20.05 in New York, as metals prices slipped on the Chinese growth outlook. The Moscow-based company’s American depositary receipts traded at a 0.9 percent discount to its shares in Moscow, the most since Jan. 9. One ADR is equal to one-tenth of an ordinary share. The Standard & Poor’s GSCI index of 24 raw materials dropped 0.1 percent to 703.43, as aluminum, copper and nickel retreated. Chinese Premier Wen Jiabao reduced China’s economic growth goal to 7.5 percent for 2012, from 8 percent over the past seven years.

United Co. Rusal (486), the world’s largest aluminum producer, slumped 6.6 percent to HK$6.07 in Hong Kong trading as of 11:10 a.m. local time. The MSCI Asia Pacific Index fell 0.9 percent today as concern that global economic growth may slow crimped the earnings outlook for miners and machinery makers.

Mechel Declines

Mechel (MTL), Russia’s largest producer of coal for steelmakers, fell the most in three weeks in U.S. trading, slipping 5.6 percent to $10.56. Mechel received 13 percent of revenue from Asia in 2010, up from 3.3 percent in 2007, data compiled by Bloomberg show. The ADRs, which lost 71 percent last year, have gained 24 percent in 2012.

The company’s Micex-traded shares lost 0.7 percent to 326.30 rubles, or the equivalent of $11.12. One ADR represents one ordinary share. The ADRs traded at a 5 percent discount to the Moscow stock, the most since Jan. 26.

Returning 16 percent this year, the Micex is beating gains of 11 percent in China’s Shanghai Composite Index and 12 percent for India’s BSE Sensex Index. Only Brazil’s Bovespa (IBOV) offers higher returns among the biggest emerging nations in 2012, at 18 percent.

Central Depositary

Russia’s Micex-RTS Exchange -- which runs the Micex, RTS and futures indexes -- is planning an initial public offering for 2013 and plans to introduce key reforms to open up the market to more foreign clients and simplify trade, Sergei Sinkevich, the bourse’s vice president, said in New York yesterday.

The exchange will make the switch to so-called T+3 trading, where traders are allowed as many as three days to complete transactions, from mid-2012, Sinkevich said. The exchange expects to introduce a central securities depositary in the middle of the year, allowing more foreign investors, particularly U.S. pension funds and mutual funds, to trade, he said.

The 30-stock Micex rallied 1.1 percent to 1,625.74 yesterday, while the RTS (RTSI$) added 1.5 percent to 1,752.17, the highest level since Aug. 5.

Lukoil Downgrade

OAO Lukoil (LUKOY), Russia’s biggest non-state oil producer, fell for the first time in four days in U.S. trading after IFC Metropol cut shares of Russia’s second-largest oil producer to “hold” from “buy,” after it reported a decline in fourth- quarter profit. Lukoil ADRs dropped 0.6 percent to $65.01 in New York, the biggest decline since Feb. 22.

A decrease in oil prices is the biggest risk to the Russian economy following the presidential election, according to Fitch Ratings Ltd.

Growth in government spending has widened Russia’s non-oil and gas fiscal deficit to 10 percent of gross domestic product and increased the budget break-even oil price to about $117 a barrel for 2012, according to an e-mailed note from the ratings company yesterday. Fitch cut its outlook on Russia’s BBB credit rating to “stable” from “positive” in January.

Urals crude, Russia’s chief export blend, was little changed at $122.89 yesterday, the lowest level since Feb. 29.

To contact the reporter on this story: Ksenia Galouchko in New York at kgalouchko1@bloomberg.net

To contact the editor responsible for this story: Emma O’Brien at eobrien6@bloomberg.net


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