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. Last Updated: 07/27/2016

Speculators Turn to Second-Tier Stocks

Second-tier stocks, long ignored or tapped only for short-term speculative gains, are starting to attract investors as shares in the largest companies appear expensive and economic growth is accelerating.

Analysts and fund managers said Thursday that investors were buying up shares in smaller oil firms, regional telecom and energy companies and metals producers.

"More and more investors want exposure to Russia because the macroeconomic story is so strong," said Michael O'Flynn, an equity salesman at United Financial Group.

He cited regional fixed-line telecom company Uralsvyazinform, steel producer Severstal and far eastern electricity provider Irkutskenergo as examples of second-tier stocks whose liquidity has soared very recently.

Traded volume remains relatively low but has grown in the past week or so.

Turnover in Uralsvyazinform shares increased to between $700,000 and $800,000 per day from a previous three-month average of around $500,000. Severstal daily traded volume doubled to $250,000.

Irkutskenergo volume has risen to around $170,000 per day from a previous three-month average of $75,000.

Other traders said volume in Norilsk Nickel had risen to between $5 million and $10 million per day from a previous 12-month average of three million.

As the world's biggest producer of palladium and nickel, Norilsk is not strictly a second-tier company. But the market for its shares has traditionally been small in comparison to those of Russia's big oil companies.

A similar wave of buying boosted the stock market before the August 1998 crash, when the Central Bank effectively devalued the ruble, freezing the domestic debt market and sending investors fleeing.

Chris Weafer, chief strategist at Alfa Bank, said today's situation could not be compared with 1997.

"Then, playing the Russian stock market was akin to playing a roulette wheel. But this time the move to the second tier is justified because people are trying to understand the investment cases and the companies," he said.

The government is forecasting that the economy will grow 5.9 percent in 2003 after expanding 7.2 percent in the first half.

The World Bank estimates it will grow by 6 percent over the whole year if oil prices are stable, while some private economists are forecasting growth of as much as 7 percent.

The country's benchmark Russian Trading System index has leapt 55 percent to close to 550 points since the start of the year.

"Second tiers often play catch-up to a move in the blue chips with an appropriate time lag," said Ari Krel, portfolio manager at UFG asset management.

"This catch-up effect is under way and driven by investors looking for value outside an index that is up 50 percent."

The second-tier spurt shows investors have recovered their nerve after a summer scandal that saw prosecutors detain a key shareholder in oil company Yukos and charge him with theft of state property.

The arrest, coming as Yukos is due to merge with rival Sibneft, initially scared investors, who saw it as a sign authorities were trying to clip the wings of the country's super-rich businessmen.

"The scandal did not produce a major drop in prices. That showed people the market is stable and can take blows," said Oleg Martynenko, head of domestic trading at Alfa Bank.