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. Last Updated: 07/27/2016

RTS Hits All-Time High of 573.85

Buoyed by a rising tide of oil, the stock market sailed into uncharted territory Wednesday as the benchmark RTS index eclipsed its previous all-time high.

Riding the back of planned oil production cuts by OPEC, which sent world oil prices surging 3 percent, the dollar-denominated index rose 1.3 percent to close at 573.85, surpassing the high-water mark of 571.66 on Oct. 6, 1997.

But that previous record high came just 10 1/2 months before the August 1998 crash, and a few days shy of a year before the market hit rock bottom, an all-time low that still gives market analysts occasional nightmares.

And behind the bubbly opened at brokerages across town, doubts lingered about the leg strength of this bull market, which has lifted the RTS by just under 60 percent since the start of the year.

Like any milestone, this one is little more than a play on numbers, said Pavel Naumenko, head of equity trading at Renaissance Capital, minutes after the exchange closed at 6 p.m.

"Sure, we drank champagne to this, but you can't compare these prices [to those in 1997]," he said. "Companies in the index have changed, investors have changed, the world situation has changed."

Macroeconomic conditions are particularly different from 1997, most analysts note, with continuing budget and current account surpluses, falling government debt and Russia being "a real cash economy," said Al Breach, chief economist at Brunswick UBS. He rattles off a bunch of positive indicators: real GDP growing by about a third since the crisis, productivity rising by almost 50 percent, double-digit industrial growth.

On a corporate level transparency has increased, and investors can now use financial indicators to evaluate companies, said Peter Westin, chief economist at Aton. And in investments there has been a fundamental shift from portfolios to FDI.

"Direct investments are looking more at fundamentals" of companies, Westin said. "They are coming in with big plans, staying for longer, bringing in management and know-how," all of which raises corporate values.

The market is now fully valued, most analysts say. But underpinning the recent rally are factors that have little to do with the fundamental value of companies.

Too much money chasing too few shares is the main reason behind the increases, said James Fenkner, chief strategist at Troika Dialog, echoing many analysts and traders.

"Most of the blue chips right now are way overvalued," he said, comparing the rallies to the "unbridled optimism" prevalent in 1997, before the crash.

"There was some very poor analysis in '97, and we see that same mentality now, where brokers begin looking at the liquidity of the market, rather than qualities of the companies they are selling."

It is hard to quantify how much money has entered the market, but Yukos buyback and dividend payments alone will release $7.75 billion in cash by the end of the year, Fenkner said.

Meanwhile, management -- often at state-owned enterprises -- are holding on to their shares, while companies are not releasing IPOs, creating a dearth of paper.

Representation on the RTS is also raising concerns. The fastest-growing sectors in the economy, like retail trade, real estate and construction, hardly figure in the index, Fenkner said.

Chris Weafer, chief strategist at Alfa Bank, said the manufacturing and consumer goods sectors represent just 3 percent of the RTS. "You'd normally expect 50 percent" in a developed exchange, he said.

Between 70 percent and 75 percent of all capitalization hangs on the oil and gas sector -- hence the large increases on the news that OPEC would lower production, pushing up the price of oil. The oil sector has grown by between 9 percent and 11 percent this year, according to Westin.

The latest rally was driven heavily by oil companies, with Surgutneftegaz in particular gaining almost 6 percent during day trading.

"Oil stocks are still quite cheap," said Naumenko, echoing analysts like Al Breach from Brunswick and Alex Kantarovich, chief strategist at Aton.

Renaissance predicts the highest end-of-year value for the index, at 590, based on continuing high commodity prices, strong growth and political stability. Aton foresees an RTS level of 573 by the end of the year.

But Alfa Bank and Troika are less optimistic, with projections of 554 and 533 respectively.

Alfa has been particularly colorful in playing down the latest gains.

In its research note on Monday's 1.7 percent rally, Alfa said, "The recent behavior of investors in Russia would surely tax the descriptive powers of even psychoanalysts," because much of the rise was based on a "rehash of information and opinions that we have all heard before -- several times."

When the RTS rose to 566.6 on Tuesday, Chris Weafer, Alfa's chief strategist, seized on the last three numbers, calling the current optimism "devilish" and the trading "positively evil."

Surgutneftgaz's rise, he said, was based on rumors of imminent corporate activity, "rumors that have been drifting up from the netherworld since early summer" and should have been priced in already.

Fenkner is also no fan of high oil valuations. He said he could see the market rising to 600 soon, but purely on momentum, while many investors are still chasing "cheap" assets that are no longer cheap.

Oil shares, for instance, have risen dramatically despite companies being hobbled by low domestic prices and non-diversified business based almost entirely on exporting pure crude, he wrote in a recent comment in The Moscow Times.

Meanwhile, the low prices to earnings ratios boasted by Russian oil giants are based on inflated earnings due to lower depreciation, he wrote.

Investors have also ignored political risks, according to several market analysts. The market has either grown on the back of political stability, "or at least [investors] are ignoring potentially negative news on the political front," Naumenko said.

Roland Nash, chief strategist at Renaissance, sees RTS growing strongly, despite capital leaving the country due to political doubts. "The market is choosing to ignore the political uncertainty, and I think it could be mistaken in doing so," he said.

Ultimately, Nash said it would be political factors, particularly further banking and administrative reforms, which could make or break continued growth. The public sector also remains a problem, he said.

"The big clash during Putin's second term will be the quite efficient private sector running against barriers put up by the inefficient public sector," Nash said.

"The government needs to get its parties into the Duma. That's the necessary precondition for higher growth and reforms," says Weafer. "If [after the elections] there is not a push on the reforms, then Russia is just another commodity boom-and-bust economy, and you run into the danger of the [1998] collapse."

Dec. 7 is the date analysts are bracing for, he added.

As of Wednesday's close, the RTS was up 59.8 percent on Dec. 31, 2002. The all-time low of 37.74 came almost a year after the previous record high.

That low-point was on Oct. 2, 1998 -- exactly five years ago.