Page 77 - RusRPTNov18

8.3 Stock market
8.3.1 Equity market dynamics
Index Watch – MSCI EM EMEA; survival of the biggest – five years after . This year’s correction in EM (-19% since the May Review cut-off date on 23 April) implies that most of the index changes during the November review are going to be on the negative side. The MSCI is to announce the results of its November Semi-Annual Index Review on 13 November, with all changes effective after the close of trading on 30 November. The MSCI is to use the prices of one of the last ten business days of October (18-31). While not formally indicated in the MSCI’s methodology, the agency has historically tended to use one of the first five of these days (18-24).
About two thirds of the capitalization of Russia’s stock market is made up of oil and gas names and in the past the market’s performance has been closely tied to the price of oil. However, as politics have come to player a bigger role the relationship between the cost of a barrel of the black stuff and the height of the leading dollar denominated RTS index has broken down. And the relation was further weakened by the re-introduction of the so-called budget rule at the start of this year, where all government oil revenues from when oil prices are over $40 are siphoned off into the state’s rainy day fund. There is a handy rule of thumb for checking if Russian share prices are over or under valued as the RTS’s value is on average x20 the cost of a barrel of oil. Although this relation doesn't work as well as it used to despite the run up in oil company prices this year, that are easily outperforming the RTS, according to the rule of thumb the RTS is undervalued by over 400 points as of August – the biggest gap it has displayed for at least two years. At the time of writing the RTS was 1,085 and oil prices are averaging $77.1, which means the implied RTS value should be 1,541. Analysts agree that the RTS is probably undervalued: BCS Global Markets has a year end target fro the index of 1,350, but given the higher than expected oil prices so far this year, even that looks conservative – if it weren’t for the politics dogfight between Moscow and Washington.
77 RUSSIA Country Report November 2018 www.intellinews.com