Page 78 - IFR Opportunities in Russian capital markets

CHAPTER03
ifrintelligence reports/Opportunities in: Russian Capital Markets
Banks
Growth in the domestic economy will mostly be unaffected by any global problems, or at least not in 2007. Sberbank is now in a strong position, having secured almost US$9bn of additional capital at the start of 2007, so it has enough funding to sustain strong growth via lending expansion this year. Sberbank and Vozrozhdenie Bank are the best valued sector plays.
Fixed-line telcos
Siberia Telecom, Volga Telecom and Uralsvyazinform are all trading at a cheaper 2007 P/E than the market average. Volga and Siberia also have among the highest upsides to target price. A good hedge strategy would be to go long both Volga and Siberia while shorting the most expensive stock in Alfa Bank’s coverage universe, Rostelecom.
Consumer
Because a domestic consumer theme was favoured through most of 2006, the pure consumer stocks, such as food producers and retailers, are now expensive. None have 2007 P/E ratios below the market average, and only Lebedyansky has upside to the 12-month DCF-based target price greater than the market average. X5 Retail Group is the next best with 14% upside.
Sell-off cycles
Sell-offs occur regularly in the Russian market and it is no place for the weak of heart. Typically, when a sell-off starts it lasts for a few weeks and the index can drop by as much as a third. However, thanks to the benign conditions of recent years, the market has always recovered over the next 10–20 weeks. This cycle of sell-and-bounce-back has been in place almost unbroken since the start of the market's post-1998 financial recovery (see Table 3.26).
Table 3.26: RTS cycles, 2003 – 06 (%)
Start Finish Loss (%) Gain (%) Weeks
02/07/03 17/03/07 20/10/03 19/11/04 12/04/04 28/07/04 06/10/04 21/12/04 11/03/05 17/05/05 04/10/05 19/10/05 27/02/06 13/02/06 06/05/06 13/06/06 11/08/06 25/09/06
17/07/03 –18 2 20/10/03 52 13 19/11/03 –25 4 12/04/04 63 21 28/07/04 –34 13 08/10/04 34 10 20/12/04 –21 10 10/03/05 21 11 15/05/05 –12 9 04/10/05 64 19 19/10/05 –16 2 27/02/06 72 18 10/03/06 –12 2 06/05/06 30 8 13/06/06 –30 5 11/08/06 34 8
25/09/06 –12 30/11/06
6 22 9
Source: DataStream, RTS
Many of the sell-offs in the Russian markets have been provoked by politics, such as the arrest of Yukos owner Mikhail Khodorkovsky, or external shocks such as falling oil prices.
However, there is a clearly definable seasonality to the rallies and sell-offs. Typically, the market rallies from the late autumn until just before Easter and then sometime between March and April there is a sharp correction of some 10% or more. Historically, the first two months of the year have accounted for most of the year's returns (see Tables 3.27 and 3.28).
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