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. Last Updated: 07/27/2016

Where Do You Expect the RTS to Be in January?

For MT


James Fenkner, Troika Dialog strategist:
"Based on our fundamental valuations of the component companies of the RTS, the index's fair value is just over 400, or around 20 percent higher than today. Should the current U.S.-Iraq war premium for oil prices collapse and Brent drop below the $20-per-barrel long-term average used in our models, this target would have to be lowered. While Russia's political risks seem low through the end of 2002, so does the government's willingness to push through meaningful reforms and/or tariff increases. The upside is also limited by the market's strong performance since 1999, with the RTS up over 450 percent in just under four years.

"Consequently, the Russian oil sector, which accounts for over 75 percent of the RTS index, is far less undervalued than it once was. On our expectations for 2003, EV/EBITDA [enterprise value to earnings before interest, tax, depreciation and amortization], Russia's oil companies still trade at a 40 percent discount to international majors, but already at a premium to emerging market peers like Petrobras and Petrochina.

"Technically, the RTS Index is set to end 2002 around 400. However, given the global equity malaise and Russia's historically weak September, the RTS might weaken before recovering during the fourth quarter."

For MT


Roland Nash, head of research at Renaissance Capital:
"We are firmly bullish on the Russian equity market. Despite global fears, we see the domestic arguments for Russian equity more than compensating. At the end of last year, we wrote that the RTS would reach 400 by the end of 2002. We stick by that forecast now, based on a bullish view of the macroeconomic backdrop, equity valuations and fund flow.

"Squinting a little, a glance over the major macroeconomic ratios illustrates how Russia remains one of the countries most insulated from any U.S.-inspired global double-dip. Few economies can offer a 9 percent of GDP current-account surplus; international reserves equal to 80 percent of annual imports; GDP growth of 4 percent-plus; a budget surplus in excess of 2 percent of GDP; debt levels that have fallen from 120 percent of GDP four years ago to 40 percent now; reserves rising by a half-billion dollars a week; and a situation where the largest macro-headache is what to do with all the money trying to get in.

"On the valuations side, the Russian market remains the cheapest in the world. On an aggregated price/earnings basis, Russia at 8.5 tops the valuation charts, all the more impressive compared with Russian debt. Debt suggests that Russia should be trading at a significant premium to emerging market peers, while equity continues to trade at a substantial discount.

"Fund flow is similarly compelling. On a monthly basis, Russia enjoys net inflows into its economy of 50 billion rubles [$1.6 billion], or roughly 5 percent of the monetary base. While there are real fears this will eventually prove inflationary, in the short term, this is likely to prove positive for Russian assets.

"Obviously a collapse in the world oil price or a further slump in global markets will leave the RTS with little short-term directional choice. Moreover, September is never a good month for Russian equity. But while we respect the argument that some autumn-hating ghoul with a penchant for equity markets may have put a curse on September, we remain confident economic rationality and domestic good news will triumph and the market will rise above 400 before the end of the year."

Peter Westin, senior economist, Aton Capital:
"Under current global market conditions, it is hard to make projections about where the RTS will end this year. While Russia's market has shown great resilience against negative trends in emerging markets and stagnating U.S. and European markets in the last couple of years, it caved in as the United States was hit by its corporate scandals earlier this year. Russia's stock market showed that it could grow as major markets were stagnating, but not as major markets fell. The global picture with record-low interest rates in the United States, which historically has meant an inflow of capital to emerging markets, as investors are looking for alternative parking spots for their capital, has not triggered global investors' interest as emerging markets as an asset class are suffering from negative developments in Argentina, Brazil and Turkey. In other words, the recent downturn is not homemade but rather a (not surprising) sign that Russia remains connected to global markets. The recent downturn has jittered market makers, even in the summer, which is normally seen as a period of calm.

"Despite this, the potential for Russian stocks remains positive. With Western and other emerging market peers, Russian companies continue to look cheap. Another positive note is [that] the volatility of the RTS continues to fall, implying a reduced risk of a sharp rise or fall in the near future. Another factor reducing this risk stems from the low level of portfolio investments compared to pre-August 1998. The fact Russia is leveled with less 'hot money' means the risk of a large capital outflow in the event of a financial shock has diminished. At the same time, it is important to recognize Russia's stock market contains only a handful of actively traded stocks with limited free-float.

"Russia's macroeconomic situation remains one of the strongest of all emerging markets. However, with a gloomy prospect for major global markets, this represents a catalyst but not the fuel. Equally, the elections in 2003 and 2004 are likely to put the restructuring of Gazprom and UES on the back burner.

"Under current global gloom, Russia's stock market is unlikely to impress. But should global conditions, especially the United States, stabilize in the third quarter, Russia can once again attract investors' attention and the RTS could reach beyond the 400 mark and even test recent highs by the end of this year."

For MT


Peter Lavelle, Moscow-based analyst:
"This is truly a difficult question to answer, coming on the heels of the market season traditionally called the dead month of August and with the rudderlessness of Western markets. My best estimate is that we will see the market trading at and around 400 by the start of the next year.

"The reasons are the following. First, political risk domestically is secure. [President Vladimir] Putin, being the micro-manager he is, ensures that the political environment will remain quiet -- even boring. Investors like this -- domestic and foreign.

"Second, the economic situation is strangely optimistic without much substance. The Russian economy is slowing down no matter how one looks at it. However, on the positive side, we are witnessing real growth as opposed to recovery from the August 1998 financial crisis. Said differently, it is no longer possible to take advantage of the ruble devaluation as a result of that crisis.

"Third, global uncertainty in regards to the U.S. government's saber-rattling over Iraq has limited impact on Russian blue chips. For Russian oils, war or no war, the long term is bright and radiant.

"Finally, UES's restructuring -- a drag on the index -- has basically been priced in. By year's end, there should be more clarity and, as a result, more interest in the company. Also, it should be remembered that the recent re-ratings from a number of international rating agencies have yet to be fully appreciated.

"The RTS will continue to outperform its emerging market peers and its developing market cohorts. Russia's blue chips are sleepers in a way -- ever so slowly they are turning themselves into world-class companies while remaining undervalued."

For MT


Igor Lossavio, acting head of sales and trading at Prospect brokerage:
"I wish we could see May 2002 levels, but the reality is different now. Tight correlation with the Western market makes the RTS a victim of international investment gloom, while domestic news indicating lower tax collection, decrease in corporate profits and continuing capital flight gives little cause for optimism. My bet is 365 to 375."

For MT


William Browder, CEO of Hermitage Capital Management:
"It is nearly impossible to make an accurate short-term prediction of the Russian market, particularly because in the last few months it has been tossed around by mostly external forces.

"If we base a prediction purely on Russian valuations and fundamentals, the market would go up. At the moment, everything is going well for Russia and the equity market is still very cheap. The Russian market is trading at PE [price to earnings ratio] of 7, which is cheaper than the PE of 13 for the average emerging market and 32 for the Standard & Poor's 500. This is happening in a context where Russian bonds are trading at a premium to other emerging markets. In the absence of external events, this anomaly would almost certainly push Russian equities up.

"Unfortunately, we can't look at Russia in a vacuum, particularly since there has been a major shock to Western equity markets this summer. If you look at previous market shocks, you find that all markets, regardless of their fundamentals, start behaving in the same manner and exhibit extremely high levels of correlation. This certainly turned out to be true over the last three months as we saw greater than 80 percent correlation between Russian and U.S. markets.

"For the Russian market to start reflecting its good fundamentals in the short term, we need either calm in the world markets, or a decoupling from Western volatility. While it is difficult to predict either, we can also say that in the medium term, fundamentals tend to win out over technical factors. It is only a question of from what level the Russian market starts rising and when."

For MT


Mattias Westman, fund manager, Prosperity Capital Management:
"I predict that the RTS will end the year at 420. Naturally, this is dependent on all other things being equal. As we live in turbulent times, this is a fairly unlikely scenario. All sorts of external events from terrorist attacks to invasions of Iraq and default in Brazil could influence the outcome in the next four months. Having said that, I believe the Russian market is beginning to get a life of its own. Dependency on external funds is quite small with all sorts of surpluses and Russian investors becoming ever more important in the market. We see some leading companies getting closer to becoming real corporations rather than some Soviet legacy. Quality of operations and transparency is improving radically. Even some of the more conservative companies are picking themselves up for fear of being left behind and taken over by their nimbler brothers. Even as prices for stocks have risen in the last few years, it is easy to see that valuations, both in absolute and certainly in risk-adjusted terms, have gotten more attractive.

"We are also seeing a growing maturity in large foreign institutional investors. A few years ago, investing in Russia was to a large extent a gamble best left to the speculative and the risk-neutral. Now companies are taking giant strides and some are well on their way to becoming major international companies, only with higher growth and cheaper valuations than their Western peers. Ironically, it is the bond investors, the ones that were most hurt by default and devaluation, that have been the first to re-embrace Russian assets. Russian bonds now trade more expensively than those of many major emerging markets. Russian companies still trade at significant discounts, particularly taking into account their better growth rates. This cannot last and we are bound to see another major re-rating in coming years."