Search for the Bottom Has Markets Sluggish

It was a strangely personal moment.

Finance Minister Alexei Kudrin took time out at a conference on globalization last week to answer some handwritten questions. The most impassioned of these came from a group of minority shareholders in VTB, one of the country's worst-performing stocks since the bank's "people's IPO" last May, on why the stock was in freefall.

Leaning toward the audience, Kudrin first noted that the investors, many of whom had counted on the government's pledge to support the stock, should be aware that stocks go down as well as up. Then, in what analysts suggested was talking up his own company, Kudrin, the chairman of VTB's supervisory board, urged investors to "hang on."

"Do not sell your shares at the moment," Kudrin said. "If you can wait, do wait, until the shares go back up."

The investors will be hoping that he is right. VTB shares have been languishing at rock bottom for weeks now as banking stocks fall out of favor.

Russian markets failed to react after global stock markets rebounded strongly Tuesday to the news that UBS and Lehman Brothers had issued new shares to shore up their positions.

"It was a combination of wishful thinking and a hope that the worst of the crisis is behind us," said Erik DePoy, a strategist at Alfa Bank. "Here in Russia, investors were very much more skeptical that there was a fundamental reason for that gain -- in the end, they were right."

After the surge, some investors were tentatively starting to call the bottom in global markets. Russia, despite its strong fundamentals and resilience to the global crisis, has closely tracked international markets since the beginning of the year.

"Notwithstanding another major escalation in bad news flow concerning credit market losses or the global economy, many investors seem prepared to accept that we are now close to an asset price bottom," UralSib said in a research note Friday.

Yet the bottom might be harder to call here.

Anton Khmelnitski, a director at Polar Capital in Kiev, said Russian oil stocks were trading at one-third of their valuations in comparison with their Western counterparts, making them extremely attractive. Steel, on the other hand, is becoming overvalued, he said.

"The market will be quite selective," he said, "and a safer bet would be oil and gas."

As the second quarter kicked off, trading on Russian markets was torpid at best. It was another week of inflows into Russian-focused funds, marking $1.2 billion of inflows in the year to date, but that was tempered by Central Bank figures that recorded a net capital outflow of $22.8 billion from the country in the first quarter.

On the RTS and MICEX, there was little buying and selling, which analysts attributed to the tougher liquidity situation in April as companies make their tax payments, and to continued uncertainty about where the markets are headed.

That uncertainty was further fueled by U.S. data Friday, showing that 80,000 jobs were slashed in March, the biggest cut in five years and the third straight month of losses. Investors were given further food for thought by Fed chairman Ben Bernanke's admission that a U.S. recession was possible.

"The fund managers are sitting on the cash. They are not yet comfortable enough to put it to use in the market. They are hoarding cash just in case," DePoy said.

"Traders and sales guys here are twiddling their thumbs, and trying to [stay] enthusiastic -- the calls aren't really coming in."

Earlier in the week, Alfa trimmed back its year-end target for the RTS to 2,850 from 2,920 points, while UralSib remains determinedly upbeat, maintaining its year-end target at 3,000.

The RTS closed up a small 0.5 percent on the week to 2,059.05 points, while MICEX scratched a 0.4 percent gain to close up at 1635.04 points.

"A lot of people ... are waiting for some stability in the global markets to start investing," said James Beadle, a fund manager at Pilgrim Asset Management.

"But I think that they will have a long wait, and in my experience, people start to get bored of waiting after a while, so they might start investing before they see what they want to see."