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. Last Updated: 07/27/2016

Surging Stocks Put World on Notice

This month’s rally in stocks put the rest of the world on notice that Russia is once again a place to receive hefty profits on equity investments.

As the markets soar to new highs this year, however, investors are left wondering whether the upswing is a signpost for a turning point in the economy or simply a temporary reprieve.

September — a month that has brought with it no small amount of volatility in the past — has so far been kind to equity markets. The MICEX and RTS are up 10.7 percent and 16.8 percent for the month, respectively, with 2.8 and 4.1 percent of the gains coming in the last week, when both markets broke through old year highs, which were set in June.

The MICEX is now up 95 percent on the year, closing the week at 1208.35, while the RTS up 97.1 percent on the year, finishing at 1245.56.

Optimistic comments on the economy from top officials gave investors plenty of reasons to cheer. On Wednesday, First Deputy Prime Minister Igor Shuvalov said the worst of the recession had past and the economy was moving into a recovery phase. Shuvalov’s sentiments were echoed Friday by Prime Minister Vladimir Putin, who said the government would soon roll out an exit plan to help the country emerge from the crisis.

Oil has also played a hand in driving stock prices higher. Crude spent the month hovering in the low $70 range, near a year high of $74.95 per barrel it set in June, and finished last week at $69.95 per barrel. Indeed, the resurgence of oil, the country’s main export, had a major role in luring investors back to Russia’s equity markets, analysts said.

“Investors were very pessimistic about Russia in the first half of the year, but that all changed as oil prices rebounded,” said Yulia Tseplyayeva, chief economist at Merrill Lynch.

But while oil pushed stocks higher as it soared to current levels from a low of $40 per barrel in December, it also has the potential to bring the party to a screeching halt.

Finance Minister Alexei Kudrin warned Thursday of a correction in oil prices in two to three months, when the Federal Reserve may shrink the supply of dollars because of the threat of inflation.

Oil will probably slide to between $57 and $60 per barrel and stay there for the next three years, dropping to as low as an inflation-adjusted $50 per barrel by 2103, the minister predicted.

The government is basing its budgets for the next two years on oil prices of $58 and $59, respectively, for Urals crude, Russia’s main export blend.

Despite the uncertainty ahead, analysts and traders remain confident that equity markets have not yet finished their run.

The markets’ recent behavior is in keeping with the nature of Russia’s economic cycles, said Renaissance Capital’s Roland Nash.

“Russia has always been a boom or bust type of play. We’ve seen the bust, now we’re seeing the boom,” he said. “The big question is not whether there is a recovery, but the speed and nature of that recovery.”

Nash said the market would go higher in the medium term, despite the spectacular run it has already had this year. As the equity rally matures, he recommended taking profits in blue chips that have had a big run and shifting over to domestic stocks.

“Evraz might have doubled, but it’s still down 70 percent from its peak. If it doubles again, it will still be down significantly off its all-time high,” he said.

Steelmaker Evraz’s London-traded Global Depositary Receipts finished the week up 11.25 percent at $26.70 per share, despite the fact that 400 workers staged a strike at one of the firm’s South African mines.

The rally has attracted players that have long been absent from Russia’s equity markets, said Anatoly Darakov, head of equities at Citibank.

“While the market was left in the hands of local money at the end of last year and the beginning of this year, now we are seeing many new types of investors coming in, including global market funds and hedge funds. The picture is becoming much more complicated and more interesting,” he said.

Darakov recommended investing in stocks with “Russia-specific stories” whose performance will not be entirely dependent on moves in global equity markets, like Pharmstandard and retailers X5 and Magnit.

Shares of Pharmstandard closed up 20.6 percent on the week at 1499.31 after reports that the drug maker was considering buying rival Ingavirin. Retailer X5 Group’s London-traded Global Depositary Receipts closed up 6.4 percent at $23.95, while competitor Magnit closed down 4.5 percent at 1615.76 on the MICEX.