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. Last Updated: 07/27/2016

Western Investors Wary of Stock Rally

LONDON -- Russia is the world's best performing stock market this year but despite enjoying a 174 percent rally in dollar terms, foreign investors say there has been no fundamental rerating of the market.

What has changed is the oil price.

"Oil goes up; the stock market goes up. We would not be talking about Russia if oil was still $10," said Matt Linsey, director at Baring Asset Management's emerging markets division.

Brent crude prices have surged through $18 per barrel as cuts from producing nations started to bite, and oil prices are up $8 per barrel from February's historic lows.

Analysts say that the injection of up to $200 million from restructured defaulted GKOs, or treasury bills, debt into the stock market and a $4.5 billion loan from the International Monetary Fund has already been priced into stock prices.

The Russian stock rally continued Tuesday, with the Moscow Times Index of 50 leading shares rising a heady 5.33 percent to 112.43 on turnover of $25.69 million.

However, overall volumes on the Russian market remain pitifully low, mostly at $12 million to $15 million a day in June, analysts said.

Matt Thomas, analyst at investment bank CAIB, said that although he believes offshore trading has been three to four times that level, he thinks the economy needs to show an improvement before foreigners commit more funds.

"There is no demand-side evidence to support the argument that Russia is experiencing a macroeconomic recovery. Although we remain bullish in the short term, we are skeptical further out," he said.

Russia is trading at the same level as this time last year and the index is more than six times the post-crash level of 10.99 points in October, although it is still way off the March 1998 high of 135 points.

Yet this cannot disguise the fact that for many investors Russia is either off limits or a tiny play for regional and emerging market specialists.

Meanwhile, the rise in oil prices prompted Merrill Lynch on Tuesday to raise its 1999 and 2000 earnings forecasts for LUKoil, Russia's largest oil company. But despite raising this year's net income forecast from $92 million to $451 million and next year's from $333 million to $602 million, Merrill maintained its "neutral" recommendation on the stock because of Russian market risks and LUKoil indebtedness.

Overall, Merrill believes that as much as $150 million to $200 million may be waiting to enter the Russian equity market as a result of the GKO debt restructuring and coupons on ruble bonds.