October Puts Brakes on Rally

VedomostiA trader at the MICEX, the world’s best performing market so far this year.

The markets started October in dramatic fashion, as worse-than-expected U.S. economic numbers and falling oil prices put the brakes on the five-month rally.

Market watchers, however, said a sell-off this month could present a perfect jumping-off point for investors looking to capitalize on the world’s best-performing equity market.

Stocks had their worst day in two weeks Friday, as the U.S. unemployment rate rose to a 26-year high and employers cut more jobs than expected in August. The MICEX closed the day down almost 3 percent at 1175.83, rallying in the late afternoon after being down as much as 5 percent during the trading session. The RTS followed suit, paring an intraday 5 percent loss to close down 3.3 percent at 1224.8.

The MICEX finished the week with a 1 percent loss, while the RTS stayed nearly flat.

Oil, Russia’s chief export, joined the sell-off on Friday, with Urals crude closing down 1.5 percent at $67.07 per barrel, still up 4.2 percent on the week.

The sell-off was distributed evenly, with most sectors experiencing an equal share of bloodletting. Power companies, which had been enjoying a rally in recent weeks, fell hard Friday, with the MICEX Energy Index down by over 3 percent. Similar losses were experienced across the board, with metals and mining, oil and gas and banking all falling more than 3 percent.

Norilsk Nickel led the 30-stock MICEX Index’s decline, closing down 5.5 percent, followed by LUKoil and Gazprom, which finished down 5 percent and 4.5 percent, respectively.

The sell-off was far from unexpected, and may even present a buying opportunity for investors willing to put up with their share of risk, analysts said.

“The markets have been very strong for the last six months, but the technical indicators have been showing a high possibility of consolidation,” said Nigel Rendell of RBC Capital Markets.

But Russia remains an attractive bet for international investors, who have been the driving force behind the market’s rally since oil stabilized above $60 per barrel in May, Rendell said.

Russian equities have led world markets in 2009, with the MICEX and RTS both up by more than 90 percent on the year.

“The ruble is strong and fixed income yields for Russian corporate bonds are high. There is a great deal of global liquidity and people are looking for a place to put their money,” Rendell said. “If we see a 10 percent to 15 percent correction, we will see a lot of cash that has been waiting on the sidelines stepping in.”

There were hopeful signals last week that the economy could be rebounding, with VTB Capital’s Purchasing Managers’ Index showing growth in the manufacturing sector for the first time in more than a year.

Also last week, the Central Bank made a surprise 50 basis point cut in its key rates Tuesday in an attempt to reinvigorate stalling credit growth.

“It’s been surprising how quickly growth has come back,” said Kingsmill Bond, chief strategist at Troika Dialog. “All we need is for U.S. growth not to collapse and the oil price to remain at reasonable levels.”

Russian equities are still “not too expensive,” Bond said, adding that the decimated property and construction sector is one place to look for bargains, such as LSR Group or Raven Russia.

LSR closed down 1.1 percent on the week at 572.97 rubles, while Raven Russia’s London-traded shares fell 3.8 percent to 38 pence.