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. Last Updated: 07/27/2016

Bulls Run Again on the RTS

Three-and-a-half years after the 1998 financial crisis wiped out almost 90 percent of its value in dollar terms, the benchmark Russian Trading System index has been creeping back up -- although it still remains well below its all-time high of 571, reached in October 1997.

The index closed at 376.11 Wednesday, a four-year high. Investors still want more -- and it seems they have every reason to expect the index to keep rising.

The RTS is up 35 percent in dollar terms since the beginning of 2002, making it the world's second-best performing market after Indonesia, which has risen 57.6 percent. According to the Troika Dialog investment company, over the past three years the RTS has recorded a gain of 333 percent, surpassed only by the Chinese Shanghai B Index.

The 63 stocks comprising the RTS index currently represent about $90.815 billion, or 90 percent of the market's capitalization. The RTS, which is dominated by foreign investors, has a total of 178 stocks, 115 of which are not included in the index.

The main drivers of the market in recent years have been the price of oil and the upside trend in global emerging markets, as well as economic developments in the United States. Oil companies have been the top performers lately, with Sibneft up 51 percent in March alone.

Thanks to its impressive performance, the Russian equity market enjoyed a liquidity explosion in the last quarter of 2001.

"But despite this, we have an inkling that not all investors are aware that the combined daily volume of Russian equities traded on exchanges is now over $250 million, not including the $80 million to $100 million worth of over-the-counter trades between brokers and their clients," United Financial Group wrote in a research note in early April.

Because the liquidity levels are still relatively low, any significant inflow or outflow of money can drive the market substantially.

"Russia is a market which still suffers from poor information quality, creating an environment where sentiment can easily override analysis," said Roland Nash, head of research with the Renaissance Capital investment house.

But if in 1997 and 1998 the market was mainly dominated by foreigners, this year it is Russian money that is leading the rally. The average trading volume on the Moscow Interbank Currency Exchange, which trades in rubles, is 10 times higher than on the RTS, making the ruble equivalent of $100 million to $150 million per day.

In general, for both foreign and local investors willing to buy into Russia, the choice of stocks is still limited. Unified Energy Systems, LUKoil, Tatneft, Norilsk Nickel, Surgutneftegaz and Yukos accounted for almost half the trading volume on the RTS in March. In total, $684 million was traded on the RTS last month.

In terms of market value, oil companies dominate the RTS, with Yukos at No. 1. Yukos is currently the largest Russian company by capitalization, worth $17.14 billion, or a 22.02 percent weighting in the RTS at the end of March. Yukos and four other companies -- Surgutneftegaz, LUKoil, UES and Norilsk Nickel -- account for 75 percent of the RTS index.

The future for the RTS, at least this year, looks quite bright. Most brokerages see a lot of upside potential in the market.

"Our 400 end-year target, which seemed so aggressive in mid-December last year, offers now little more than Eurobond-type returns this year," Renaissance wrote in an April market report.

Troika went even further. Its early April forecast saw the RTS index rising higher in 2003.

"In the best-case scenario, the index could reach 540," the company said of next year's outlook.

RTS at a Glance

Top 10 Companies by Trading Volumes in March 2002

Company Traded volume, $mln % of total
1. RAO UES 107.848 22.27
2. LUKoil 79.663 16.45
3. Tatneft 48.922 10.10
4. Yukos 38.264 7.90
5. Norilsk Nickel 37.423 7.73
6. Surgutneftegaz 36.631 7.56
7. Sibneft 23.968 4.95
8. Sberbank 18.482 3.82
9. Mosenergo 16.839 3.48
10. Rostelecom 15.222 3.10
Top 10 total 423.262 87.36
RTS total 484.4 100

Top 10 Companies by Performance in March 2002

Company Stock Price Growth, % Number of deals
1. Sberbank (preferred shares) +74.06 12
2. Sibneft +51.30 229
3. Sberbank (ordinary shares) +50.44 177
4. Tatneft +37.16 718
5. Sverdlovenergo +36.97 27
6. Sibirtelecom +36.49 31
7. Tomsktelecom +31.883
8. Tatneft +28.46 66
9. Surgutneftegaz +22.54 526
10. Yukos +22.25 348
RTS total +20.6
Source: RTS