RenCap Sees RTS Above 1,000 in 2009

The RTS may have taken a beating this year, but Renaissance Capital said Tuesday that the index would end 2009 back above the 1,000 mark, or 46 percent higher than its Wednesday closing level of 688 points.

The investment bank said that while prices on the country's equity markets had fallen deeper and faster than their global counterparts, medium-term economic prospects remained attractive.

"The near term economic outlook is awful," said Roland Nash, head of research at Renaissance Capital, warning that GDP growth could fall to 2.5 percent next year if there was no government support and capital expenditures by companies could drop by as much as 28.7 percent, against the 2.8 percent increase forecast before the onset of the economic crisis in August.

The investment bank said government fiscal stimulus proposals could see 2009 growth reach 3.7 percent. Even with the sharp slowdown at the end of this year, the latest forecast from the Economic Development Ministry still foresees growth of 6 percent for this year.

The biggest drags on growth next year will come from the real estate and financial sectors, where output could contract by as much as 10 percent, even with government support, Renaissance said. Construction, mining, and wholesale and retail trade are other problem areas, where output could shrink by 5 percent without government funding.

But the investment bank said that state support could bring construction-sector growth as high as 10 percent, with 2 percent growth in mining and 5 percent growth in retail, adding that the government has already been active.

"The Russian government has been ahead of the game in pump-priming the economy," Nash said.

He added that valuations for Russian companies are attractive even with oil at $40 per barrel and that most of the medium-term drivers of the Russian economy remain intact.

"In our forecasts, we assumed an average oil price of $50 per barrel and a 40 percent drop in the earnings of Russian companies next year," said Tomas Mundy, strategist at Renaissance Capital. "Despite the pump in liquidity provided in recent months by governments globally, the markets have been so risk-averse that global liquidity was flowing into U.S. treasuries," Mundy added, explaining that this has hurt Russian liquidity as well.

"In past weeks we have seen a weakening of the U.S. dollar, as investors are realizing that the U.S. government has a lot of debt on its balance sheet," Mundy said. At the same time, LIBOR rates have come down and banks are beginning to lend to each other.

All this should reduce global risk-aversion, with investors coming back to emerging markets, Mundy said.

Experience suggests that investment bank forecasts can be overly optimistic.

Last December, Renaissance Capital and UralSib both predicted the RTS would end this year above 3,000, a jump of at least 32 percent.

Tuesday's closing level of 688 points was less than one-third the figure of 2,233 points for last Dec. 17.