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. Last Updated: 07/27/2016

Forgotten Stocks May Get Boost From Fed

A committee of the U.S. Federal Reserve is to make a decision in Washington on Tuesday that could push the Russian stock market into a decisive rally.

Some market watchers say that while Russian blue chips could be the immediate beneficiaries if the Fed signals an end to its interest rate hikes, the real value lies in forgotten second-tier Russian stocks that could recover at last from the steep losses they endured in May.

Emerging market stocks and, indeed, equities across the globe have suffered as the Fed has continued its policy of raising interest rates, making the reliable yield of U.S. bonds more and more attractive compared with more speculative stock investments in places such as Russia.

Economists are divided on whether the Fed will raise the federal funds rate another quarter percentage point, to 5.5 percent, but most expect the committee to signal a halt to or at least a pause in future rate hikes, which would boost stocks in Russia and across the globe.

Erik DePoy, a strategist at Alfa Bank, said a respite from interest rate hikes would allow many of the mid-cap or second-tier Russian stocks to rise toward the highs they posted earlier this year. Investors have already returned to blue chips such as LUKoil and Unified Energy Systems, whose shares have almost recovered from the emerging markets correction.

"Until the coast is clear, investors are only going to invest in blue chips," DePoy said. "When the coast is clear, they're going to see some significantly undervalued stocks in the mid-cap sector."

Ovanes Oganisian, a strategist at Renaissance Capital, said the Fed decision would not immediately affect the second-tier stocks as much as the blue chips, at least in the beginning.

"When the rally runs out of steam, we will see some pickup in the second-tier stocks," he said. Oganisian defined second-tier stocks as relatively illiquid and thinly traded equities that generally had less than $2 billion in market capitalization or less than $1 million in daily trading volume across all exchanges.

DePoy said the refinery companies of Bashkortostan had been trading quite cheaply and had the potential for plenty of gain. The Ufa Refinery (UNPZ) was trading at $2.14 last week, down 26 percent from its March high. Meanwhile, Ufaneftekhim (UFNC) was trading at $3.30, down 25 percent from its February high. Both have price-to-earnings ratios of less than five, according to data from Bloomberg.

But Roman Elagin, an oil and gas analyst at Renaissance, said he thought the Bashkir refineries were overvalued since there was a possibility that Rosneft could acquire them at below-market prices. Still, Elagin said Russian refineries had been showing impressive profit margins.

Oganisian said that, in the realm of small energy stocks, he liked Victoria Oil & Gas (VOG) and Imperial Energy (IEC), two oil-exploration companies that trade on London's Alternative Investors Market. He also saw potential in mid-cap Russian consumer companies such as Lebedyansky (LEKZ), Pyatyorochka (FIVE), and Sedmoi Kontinent (SCON).