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No Time to Panic

By Sergei Balashov Russia Profile 08/06/2008

The Current Decline of the Russian Stock Market Is a Reason to Buy Shares

No bigger mistake than investing money in Russian stocks could have been made in July. Over the week of July 25th, the RTS index fell in all categories, hitting rock-bottom following Putin’s unfavorable remarks on Russia’s largest metallurgy company Mechel. This caused agitation among investors who have already heard the news of declining oil prices and warnings of the economy overheating. Now, Russia needs to find a way to bring its stocks back up, soon. 

Having stood at 2303.34 points on June 30th, the Russian Trading System (RTS) index fell to the current 1839.12 points, posting the sharpest decline on July 25 when it dropped by 115 points, or 5.58 percent. The day before, Prime Minister Vladimir Putin repudiated Mechel, claiming that the company exported its products for a fraction of the price it charges domestic customers, thereby causing a shortage on the market, driving up prices, and depriving the government of due taxes.

As a result of these allegations, Mechel’s shares fell by 30 percent overnight, bringing the company’s value down by some $5 billion.

Yet it was Russia’s largest oil and gas companies that are mostly to blame for this decline. LUKoil’s shares brought the RTS index down by 28.48 points on July 25, and Gazprom’s negative influence cost the index another 26.68 points. State-owned Sberbank stripped it of 28.32 points as well – a clear sign that something besides Putin’s rift with Mechel sent the stock market on a downward spiral.

“The situation on the stock market is rather complicated,” said Liana Pepelyaeva, deputy head of the state Duma committee for the stock market. “I think the developments of the stock market are defined by three factors, namely the oil prices, the macroeconomic stats, and consolidated reporting of the market leaders.” Oil prices have recently been on decline, falling below $120 per barrel for the first time since May (the record high of $147.27 was hit in mid-July).

“Speaking of macroeconomic data, we’re influenced by the information we get from the United States,” continued Pepelyaeva. The U.S. second quarter GDP amounted to 1.9 percent, contrary to the expected 2.4 percent, while unemployment hit 5.7 percent, a four-year high. “It did have an impact on the global market,” commented Pepelyaeva.

“Putin’s speech only aggravated an already negative setting,” said the Managing Director of the Troika-Dialog group of companies Evgeny Gavrilenkov. The negativity, however, manifested itself only in increased investment risks, as the overall economic situation in the country has generally been positive.

“The economy is showing some good numbers,” said Pepelyaeva. “According to temporary estimates, the growth in the first half of the year amounted to eight percent, and production has grown by 5.8 percent,” she added. “The dynamics are very positive, and any talk of stagnation would be irrelevant.”

“We have a budget surplus, an enormous surplus of foreign trade, accumulated reserves and an overall inflow of capital into the country,” said Gavrilenkov. “We have an economy with three major surpluses.”

As has been projected by Merrill Lynch, Russia is set to be the fourth fastest growing economy in the world in 2008, noted Pepelyaeva. “We have to understand that most foreign analysts and investment banks have evaluated the most recent stats negatively, but I would dissent,” said Gavrilenkov. “There is a plethora of reasons that they just don’t quite get. For one, we had very high investment growth rates in June and July of last year. Investment can’t grow that fast every year, a 25 percent growth is more like an anomaly, while the 17 to 18 percent we’re seeing now marks a more stable economy,” he explained.

“Investors have been patient and will keep it up,” said Chief Economist of the Trust investment bank Evgeny Nadorshin. “Someone just overestimated the risks and gave up the assets, these were mostly non-residents; the trends of the stock market have nothing to do with the fundamental economic factors.”

Instead, foreign investors’ fear can be attributed to the inclination to rely on international stock market news too heavily, suggested Nadorshin. “The foreign investors act in accordance with the news, and the market has been producing very negative news lately,” he said. This also seems to have affected their Russian counterparts, who are simply following the pattern established by the performance of other stock markets. “Russian investors have been less self-sufficient; the local investors have adopted the attitude of the 1990s, which means that when the Dow Jones goes up, we also go up, and when it goes down, we follow it down,” explained Nadorshin.

Although it has a debatable influence on investment, a positive economic climate is still expected to be the key in getting the stock market back on track. “The good rate of GDP growth, the increases in per capita income and in consumer expenses make our economy attractive and will keep interest in our markets,” said Pepelyaeva. However, a rebound won’t happen too soon.

The stock market’s recovery is expected to be lengthy, yet even the freefall had a certain silver lining to it as it tested the economy and highlighted its major improvements. “About five years ago, there was a major correction on the global market which amounted to ten percent--at the same time, the Russian market was supposed to have fallen by about 30 percent,” said Gavrilenkov. “But over the past couple of years, our correction is about the same as on the other markets, when they fall by five or six percent the same happens here. We’ve grown bigger.”

“We’ll have to wait and wait for a long time, maybe about half a year,” said Nadorshin. “The current decline is a reason to buy stock. It will take time, but there will be growth.”

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