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. Last Updated: 07/27/2016

Markets Beat Retreat As Oil Prices Decline

After almost a month of growth, the markets beat a hasty retreat last week, as falling oil prices gave stocks an excuse to take a much-needed breather.

The MICEX index rose almost 1 percent Friday, finishing the week down 1.7 percent at 1187.86, while the RTS followed suit, closing down 1.36 percent at 1225.41, down 1.63 on the week.

But the week’s performance put only the smallest of dents in what has been a stellar year for the country’s indexes. The MICEX is up 91.75 on the year, the RTS up 95 percent. Russian markets have outperformed all of the world’s major emerging markets, not to mention indexes in more developed markets.

“These days, when we have net optimism, oil goes up and the dollar goes down, which is a double positive for Russia. The reverse, however, is a double negative,” said Chris Weafer an analyst at UralSib.

Urals crude, Russia’s main export, retreated about 8 percent this week, falling to $64.39 dollars per barrel.

The fall in price caused oil stocks to lead the MICEX down this week, with Surgutneftegaz loosing 10 percent over the period to close at 24.4 rubles. Tatneft took off 5.9 percent to finish at 120.52 rubles, while LUKoil gave up 4.3 percent to end at 1587.47 rubles.

Utilities partially offset the gloom, however. OGK-5 climbed 18.3 percent over the week to 1.66 rubles after reporting that its first-half net income more than doubled. Mosenergo put on 18 percent over the week to close at 2.85 rubles, and the Federal Grid System added 15.6 percent to 0.35 rubles after the power transmission company reversed a plan to cut spending over the next three years.

Wild jumps like those seen in the electricity industry make Russian stocks an attractive play for those banking on a global recovery.

“Whatever happens in the global economy is likely to be reflected to a much greater extent in Russia,” Weafer said.

Weafer recommended that investors keep their powder dry throughout October — an often volatile month when sentiment can turn sharply — and wait until there are clearer signs of a global economy before stepping in.

Patience can be rewarded, Weafer said. “Any stock buying right now is a roll of the dice,” he said. “If we get a true recovery, some of these stocks can go up hundreds of percents.”

Steelmakers, such as Evraz and Magnitogorsk Iron & Steel Works, could do particularly well in a turnaround, he said.

Evraz closed Friday at $26.89 in London trading, up 0.7 percent on the week. Magnitogorsk closed at $9.15, with a 1.3 percent gain.

The economy is “almost certain” to recover, and it would likely take equity markets along for the ride, said Yevgeny Gavrilenkov, chief economist at Troika Dialog.

“The markets have come far this year, but look from where they’ve fallen,” he said.

The MICEX is down 45 percent from an all-time high of 1956 reached in May 2008. The RTS is down 56 percent from a high of 2487 reached in the same month.

“We are at a historically low level of production for many goods, including cars,” he said. “If there is any kind of production boost, the month-on-month numbers will be huge. The same can be said for economic numbers as well.”

The government recently revised its target for 2010 GDP growth to 1.6 percent, a level Gavrilenkov said is “easily reachable.”

An economic turnaround would likely be “gradual, and very broadly based,” affecting many sectors, Gavrilenkov said.

Oil price volatility will continue to wreak havoc on oil stocks, leaving the blue chips of the banking sector, like Sberbank and VTB, a better choice for investment, he said.

Sberbank closed Friday at 59.47 rubles, up 3 percent on the week, while VTB finished the day at .0542 rubles, down 5.1 percent.