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. Last Updated: 07/27/2016

Market Waiting for Bulls to Run After Hiccup




The Russian stock market dropped Wednesday for the second day running, but analysts said the current correction is likely to be a minor hiccup in what is shaping up as a very strong year for Russian equities.


Continuing a slump that analysts are sure will be short-lived, the MT index dropped back three points Wednesday to close at 96.38, some 4.5 percent off Monday's year high of 100.96.


That's still a more than 150 percent improvement on the 38.35 at which the MT index opened the year. But it is also a long, long way down on the index's record high of 435.77, at which the market closed on Aug. 7, 1997.


National power utility Unified Energy System was off a tiny 0.12 percent at $0.0839 while regional utility Mosenergo ended steady at $0.0445.


Russia's largest oil producer, LUKoil, edged down 2.23 percent to $9.875, and Surgutneftegaz was off 2.86 percent to $0.1596.


Volumes fell to $12.35 million after peaking Tuesday at $23.9 million.


The correction, which began Tuesday, also affected some overheated second tier stocks, but several other such stocks continued to rise Wednesday.


Nevertheless, the surprisingly strong recent boom in Russian equities - which earlier this week sent The Moscow Times Index of 50 leading stocks back above 100 - is expected to resume and take the market from strength to strength.


Several major stocks have posted incredible year-to-date gains. Norilsk Nickel for example has soared about 750 percent from the $0.365 a share at which it started the year. The stock closed Wednesday at $3.10.


Other, less liquid stocks have made even more impressive gains on paper, but the market is so tiny and they have been so little traded that it is impossible to say whether such gains could in fact be realized.


Even though the MT Index has dropped back below three figures, the change in sentiment toward Russian stocks is so substantial that the Financial Times on Tuesday reported that some analysts are talking of Russia again winning the title of "best performing market" in 1999, just like it did in 1997.


Of course, part of the reason for that is that stocks began at such an astonishingly low level this year - a legacy of 1998, when Russia was the worst performing market in the world.


Traders talked down the correction this week as a natural reaction - after the unbridled bull run of past weeks drove stocks up 30 percent in one month - one that would allow the market get its breath back."The market simply grew too significantly, a correction is good, it shows that the market is sound," said Kirill Maltsev, head of sales and trading with Rye, Man & Gor Securities.


"This is a level at which the market can quietly think of what to do next."


"'Cooling' is probably a better way to describe this," said James Fenkner, equity strategist at Troika Dialog. "The market ran too far too fast, we see what you call buyer exhaustion, but this is by no means a turning point."


"Markets don't go from zero to infinity immediately," he added.


Expectations that the upward trend is going to continue are built on Russia's improving economic performance and on hopes for a better government after the next parliamentary and presidential elections, analysts said.


The ruble is stable and the inflation rate continues to decline as world oil prices continue to rise. Russia has also made some headway on restructuring its foreign debt.


Climbing oil prices also improve foreign creditors' chances of collecting debts from Russian oil companies, including even such notorious deadbeats as Tatneft, analysts said.


Politically, investors are already looking past the presidential election with Russia's present rulers and the oligarchs to whom they are linked hopefully being moved out of the picture, Fenkner said.


"When people see an end of pain they feel better immediately," he said.


Market players also see the next State Duma as more centrist and less dominated by communists, Maltsev said.


A recent rally in Eurobonds demonstrates that investment risks in Russia have declined sharply, Fenkner said.


Even in the short term, traders saw the market recovering quickly.


Dmitry Starenko, senior trader with Troika Dialog expected the correction to last for no more than a couple of days, noting that there already was support for some of the blue chips.


Andrei Kukk, senior trader with NIKoil investment bank said he expected stocks to fall by no more than 10 to 12 percent.


"There is still more cash than paper," he said.


Russian stocks were easing Wednesday even as hundreds of millions of dollars worth of rubles were being disbursed to foreign holders of restructured frozen treasury bills.


That disbursement had been already factored in to stock prices, analysts said.


However, a surplus of ruble liquidity in the hands of both Russian banks and foreign investors is still out there, and traders expect much of it will continue to slosh over to equities and revive the stock market's steady rise.


The stock market is about the only outlet for rubles foreigners receive in exchange for treasury bills, which they cannot repatriate.


"Even if foreigners manage to take out some of the money through different schemes, they can't take it all, so they will have to participate in the market," Maltsev said.


"There is constant interest in second-tier stocks such as telecoms and energos, and this is clearly not ruble interest," he added.