With the Bosses Away, Investors Still Play

It's a slow start to the year when half the country is still on vacation. Two weeks after the ushering in of a new year, there is still a skeleton staff at many Moscow investment banks. The bosses are away, the traders are silent, and the phones barely ringing.

Those who bowed out in December with a list of glittering predictions for the Russian stock market in 2008 can feel moderately encouraged, as both the RTS and MICEX ticked up on thin volumes of trading in the first week back.

More encouraging, though, was news that Russian funds attracted $212 million of investors' money in the first two weeks of January to Wednesday, second only to India, according to EPFR Global. By contrast, China- and Brazil-focused funds, the big winners of 2007, lost $995 million between them.

"What investors try to do in the new year is to reduce exposure to markets that outperformed in the previous period and catch the upside in markets that underperformed," said Erik DePoy, a strategist at Alfa Bank.

"Russia and India seem like the favorites within BRIC. Investors seem to be scaling back their exposure to China and Brazil," he said. BRIC is the emerging markets of Brazil, Russia, India and China.

In the United States, Federal Reserve Chairman Ben Bernanke admitted last week that the U.S. economic outlook was deteriorating and hinted at an aggressive cut in interest rates.

Global woes are Russia's gain -- for now. Growing fears of a downturn in the United States reflect badly on Brazil, a significant trade partner. "The Japanese economy ... is teetering on the edge of recession, according to some views. If that happens, it will have an effect on China," DePoy said.

And if that happens, he said, it will have an effect on Russia because there will be less demand for raw materials. And so it goes on.

For now, though, Russia is looking quite rosy by comparison.

"The combination of predictability ... and higher margins does give the required critical mass on decision making for investors to invest some serious money into the Russian economy," said Vladimir Matias, a managing partner at Asset Capital Partners.

Gazprom, the top pick for many in 2008, propped up the stock markets in their first day of trading in the new year. "Everybody loves Gazprom," DePoy said. Including, it seems, Deutsche Bank and Troika Dialog, which bumped up their target price for the gas monopoly.

But it was metals that were really sparkling. Polymetal, a silver producer that has performed poorly since its IPO nearly a year ago, cheered the market with news that it has eliminated its silver hedging activity. When raising money in 2001, Polymetal secured financing from Western banks on the proviso that they conduct forward sales. The stock surged 13 percent on the news on MICEX.

"Hedging cost Polymetal around $100 million in lost opportunities in 2006 and 2007," said Alexander Pukhayev, a metals analyst at Deutsche Bank. "Investors don't like hedging. They can hedge themselves. They want to be fully exposed."

Gold, meanwhile, has been enjoying a significant rally, as investors latch on to the commodity in a weak dollar environment and as a hedge against inflation. Gold broke through $900 an ounce Friday, a record high, and the soaring prices are feeding over into other precious metals, including silver. Platinum also touched new highs last week.

"[Gold] broke through $850 in the last two weeks," said Tim Dudley, a London-based metals analyst at Arbuthnot. "People are looking for exposure to the high gold price."

Look they might, and what do they find? Highland Gold. The share price soared by 22 percent in London last week, ahead of a board decision to approve a second share issue that would give Kremlin-friendly investor Roman Abramovich a 40 percent stake.

Marat Gabitov, a metals analyst at Aton, said some buyers might be banking on Abramovich to raise his stake to a controlling one, while he predicts the miner will soon unveil a new strategy that could include some acquisitions.