Russian Stock Market Rally May Just Be Starting

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The longest stretch of gains in Russian stocks since 2005 has done little to curb the market’s allure to analysts.
Stocks on the Micex Index (INDEXCF) will rally 27 percent on average over the next 12 months, according to analyst price targets compiled by Bloomberg. That’s the most among the so-called BRIC nations as stocks on China’s CSI 300 Index (SHSZ300) are seen climbing 19 percent in the period, while those in Brazil’s Ibovespa are forecast to gain 13 percent and India’s S&P BSE Sensex will rise 5 percent.
Analysts are anticipating that the Micex, which has soared 9.1 percent over the past 12 sessions, will keep rebounding from a bear market rout earlier in the
year as President Vladimir Putin shows signs of seeking an end to the conflict in neighboring Ukraine that has triggered international sanctions against Russia. Peace plans will be “on the table” when Putin meets his Ukrainian counterpart Petro Poroshenko today in Minsk, Belarus, German Chancellor Angela Merkel said Aug. 23.
“Peace is bullish, war is bearish,” Walter “Bucky” Hellwig, who helps manage $17 billion at BB&T Wealth Management in Birmingham, Alabama, said yesterday. “Investors are attracted to Russian equities because of their low valuations and they are willing to take some risk at a time when the conflict seems to be cooling down.”

Resolution Hopes

Russian equities rallied for 10 days through Aug. 21 in the longest streak since September 2005 on speculation the standoff over Ukraine may be closer to a resolution. They resumed their advance yesterday before planned de-escalation talks between the two nations’ leaders. A Bloomberg index of the most-traded Russian stocks in the U.S. rose 0.4 percent to 87.73, paring its decline for the year to 14 percent.
The Micex closed above its 200-day moving average on Aug. 19 for the first time in a month, a sign of market strength to traders who follow technical analysis trends. The last three times the benchmark index rose through the price indicator, it added an average of 3.7 percent in the following month, including a rally of 4.4 percent in December 2012, according to data compiled by Bloomberg.
“The market sentiment will depend on the presidents’ meeting,” Vladimir Osakovskiy, chief economist for Russia and Commonwealth of Independent States at Bank of America Corp. in Moscow, said by phone yesterday. “There is potential for the stock rally to continue as Russian valuations are very cheap and that is the main reason why investors are attracted.”

ETF Flows

Investors have added almost $200 million to the Market Vectors Russia ETF (RSX), the largest U.S. dedicated exchange-traded fund tracking the nation’s stocks, this month through Aug. 22, according to data compiled by Bloomberg. The inflows put the ETF on pace for the best month since March when it saw about $570 million in new money.
Russia, which Ukraine and its allies blame for stoking the unrest, denies it’s involved in the conflict that has triggered sanctions from the U.S. and Europe and kept Russian stock valuations at the lowest among 21 developing markets tracked by Bloomberg. The Micex trades at 5.3 times projected 12-month earnings, a 57 percent discount to the multiple for stocks on the MSCI Emerging Markets gauge, according to data compiled by Bloomberg.

Market Risk

Russian stocks may lose value as Putin’s policies of state capitalism and the influence of politically connected oligarchs hurt the economy, according to Albert Brenner, who helps manage $5.5 billion as director of asset allocation strategy at People’s United Wealth Management Bridgeport, Connecticut.
“Investors should be cautious about buying Russian equities just because they are cheap,” Brenner wrote in an e-mail yesterday. “A sustained rally in Russian stock prices seems unlikely without wholesale changes in Russia’s politics.”
Russia has been the worst performer among the world’s biggest stock markets this year as the dollar-denominated RTS Index dropped 12 percent. Equities touched a four-year low in March after Putin moved to annex the Black Sea peninsula of Crimea from Ukraine. The Micex is still down 3.3 percent this year.
The Market Vectors Russia ETF gained 2 percent to $25.40. The RTS gauge climbed 0.6 percent to 1,267.42 yesterday as futures contracts on the gauge increased 0.2 percent in U.S. hours. The RTS Volatility Index, a measure of anticipated swings in the futures, fell 1.3 percent last week to 31.40. The Micex rose 0.2 percent to 1,456.82 by 11:05 a.m. today.
The sustainability of the rally in Russian equities depends on the outcome of the meeting between Putin and Poroshenko, Chris Weafer, a senior partner at Moscow-based consulting firm Macro Advisory.
“If the meeting is friendly, or even pragmatic, investors will be more hopeful and the risk premium will shrink,” Weafer, who was rated by a Euromoney Institutional Investor Plc poll as Russia’s best equity strategist in 2013, wrote in an e-mail yesterday.