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. Last Updated: 07/27/2016

Glitches Cause Worry As Markets Cool Off

Lightning struck twice at the MICEX last week, as glitches halted trading two days in a row. At least one of them was due to overwhelming volumes, analysts said, and therefore came with a silver lining, testifying to how far Russian bourses have come since their cup-and-coin beginnings.

"Bad luck? Bad isn't the word!" said Vadim Yegorov, spokesman for the exchange. "At least the markets were fairly quiet -- in both cases -- so the disruptions were small."

Each failure was the result of "external factors," he added -- an electronic-servicing error late Thursday and a power outage early Friday -- so neither was insured by the exchange, whose policies only cover internal risks. Yegorov said no losses were incurred.

"To have this happen on two consecutive days -- that is a first," said Alfa Bank strategist Erik De Poy. "This is going to raise a lot of questions about whether their infrastructure can handle the growth in volume they have seen."

Handling more than 90 percent of local trading and about two-thirds of the worldwide liquidity of Russian stocks, the MICEX dominates the local market. Last year alone, it saw its volumes triple, and the value of the companies it trades has grown eightfold this decade.

But that growth has tapered off, as exemplified on the exchange last week, when a three-day run of losses shaved more than 5 percent off the value of the index before a Friday rally allowed it to close down 1.4 percent.

The RTS Index also suffered, especially Thursday, after news broke that China's gross domestic product had grown 11.1 percent in the first quarter, rekindling fears of a bubble scenario in the world's largest emerging economy. The 12.5 percent correction registered by Russian markets on Feb. 27 was sparked by similar fears, and investors reneged on the optimism that took the index past the 2,000-point barrier two weeks ago. The RTS closed the week at 1972 with 1.5 percent in losses.

On Friday, some of the bullishness returned after figures from the State Statistics Service showed industrial growth at a lively 7.9 percent. This prompted MDM Bank to up its GDP growth forecast to 7.7 percent for the year, one percentage point higher than in 2006.

The figures also showed that in March, nominal wages had grown 28 percent year on year and real disposable income jumped 13 percent in the first quarter. The Economic Development and Trade Ministry also said last week that real wages would increase by almost half by the end of 2010.

All of this promises to keep momentum strong for any sector that depends on domestic demand -- including retail banking, consumer goods, telecommunications and construction.

"Higher multiples for companies operating in these sectors are backed by sales volumes and are unlikely to decline substantially any time soon," Vladimir Pantushin, analyst at Renaissance Capital, said in a note to investors Friday.

The same cannot be said of the staple oil and gas sector, which is much more susceptible to the worldwide market gloom. A Merrill Lynch survey of 179 global fund managers released last week found that growth expectations and perceptions of overvaluation have actually deteriorated this month since the February and March correction.

Risk appetite among the survey's respondents has nearly recovered, however, creating hope among some analysts that, in the event of a worsening global climate, investors might see a haven in markets with strong domestic growth.