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. Last Updated: 07/27/2016

After Hot Year, Market Seen Chilling

Russian equities continued their world-beating run in 2002, with the benchmark RTS index gaining nearly 40 percent to trump all but Pakistan's main bourse. But market players see little chance of similar returns in 2003.

The reason? A global slump combined with increasing domestic political and economic stability.

"We believe the Russian equity market is unlikely to perform the sort of gymnastics seen in the previous years," Roland Nash, head of research at Renaissance Capital, wrote in a market strategy paper for 2003.

The Best and the Worst
The Top 5
IndexGain (%)
1. Pakistan Stock Index118.21
2. Russian RTS Index39.85
3. Prague Stock Exchange38.25
4. Budapest Stock Exchange34.97
5. Jakarta Composite Index25.96
The Bottom 5
1. Argentina Merval-47.11
2. Brazil Bovespa-45.83
3. U.S. NASDAQ 100-37.58
4. Turkey ISE 100-34.08
5. Germany DAX-33.88
Source: Bloomberg


Strong and steady economic growth and lessening political risk translated into impressive resistance in the Russian market to the downside trend for global equities.

Except for the Pakistan Stock Index's impressive 118.21 percent gain, the dollar-denominated RTS outperformed all other indices in the world, followed closely by the main exchanges in Prague and Budapest, which gained 38 percent and 34 percent, respectively. Indonesia's Jakarta Composite Index rounded out the top five with a gain of 26 percent.

The world's two largest emerging markets -- Argentina and Brazil -- suffered the most, with Buenos Aires' Merval and Sao Paulo's Bovespa benchmark indices losing 47.11 and 45.83 percent of their value on the year.

The United States' tech-heavy Nasdaq fared little better, dropping 37.58 percent, followed closely by Turkey's ISE National and the German DAX, which shrank 34.08 and 33.88 percent, respectively.

For Russian equities, the major source of new funds this year will likely come from global investment funds and domestic investors, said Peter Boone, head of research at Brunswick UBS Warburg.

The ruble-denominated MICEX, which accounts for the lion's share of Russian stock transactions, posted a record turnover of the ruble equivalent of $44 billion in 2002, up 78 percent over 2001, as the MICEX Index gained 35 percent.

Trading volume on the RTS, on the other hand, was only $4.57 billion, just 2.7 percent higher than in 2001.

"On MICEX there is a lot of intra-day trading, when people trade small amounts back and forth," Boone said.

"There is also a lot of over-the-counter money that you don't see in the RTS volumes, while the true volumes abroad are much higher," he added.

National electricity monopoly Unified Energy Systems was once again the most actively trade blue chip in 2002, accounting for just over one-fourth of all deals on the RTS. Oil majors LUKoil, Surgutneftegaz, Yukos and Tatneft were next, with about 10 percent market share each.

In addition to being Russia's fastest-growing oil company, Sibneft was also the fastest growing stock on the RTS, gaining 195 percent on the year, followed by state savings bank Sberbank, which grew in value by 150 percent. Yukos enjoyed 80 percent growth, while United Heavy Machinery and Uralsvyazinform each gained 50 percent. Sibneft and Sberbank were also the top performers on MICEX, rising 222 percent and 189 percent in ruble terms, respectively.

The worst-performing blue chips on both exchanges were UES and its subsidiary Mosenergo, which dropped 22 percent and 26 percent, respectively, on the RTS and 12 percent and 20 percent on MICEX. The nation's flagship airline, Aeroflot, and Surgutneftegaz were not far behind.

Chris Weafer, chief strategist at AlfaBank, said Gazprom, which is listed on the St. Petersburg bourse, LUKoil, Golden Telecom, Vimpelcom and Norilsk Nickel are the top investment plays this year. In general, he said, "we will much more likely see the weakness in the RTS during the first quarter of 2003 and early in the second quarter due to the current nervousness with [world] oil prices."

But once that uncertainty is resolved, the stage will be set for growth, particularly among emerging markets, Weafer said.

"We will have a good second half of the year, particularly in those stocks that do not suffer from import competition, like the telecoms, for example," he said.

Boone tapped Yukos and Sibneft as the best picks for the coming year, while Renaissance sees metals giant Norilsk Nickel as the most interesting and safe bet outside the oil sector.

Nearly all analysts agree that the RTS Index will likely hit 450 by the end of the year, but none polled expect growth to exceed 25 percent. The index is currently at about 360.

"The big difference this year is that during the last three years the market did very well because of internal drivers. This year it won't be the case -- the markets will be extremely vulnerable to the external events for the first time since the 1998 crisis," Weafer said.