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[Third Issue of the Day]
#17
Financial Times (UK)
10 January 2002
Window of Opportunity in Russian Market
By Andrew Jack
Just when Russian equities should have gone into a seasonal slumber, they have outstripped expectations and surged ahead on the back of a voracious appetite from investors.
Traditionally, Russians wind down in late December and hardly wake up again until mid-January, after the western and orthodox Christmas and New Year celebrations have been completed.
Yet the benchmark RTS index has risen sharply in the last few weeks on unusually high volumes and there are few signs yet that the trend is slowing. With little sign of any spillover from the Argentinian default, that puts Moscow on track to continue its recent record as one of the very best performing markets in the world.
"The market has been rising without substantial resistance and fund managers coming back from their holidays with surplus cash are realising that they have to invest," says Alexei Zabotkine, economist with the Moscow-based brokerage United Financial Group.
James Fenkner, chief equity strategist with Troika Dialog, says: "There is nowhere for investors to park their dollars and generate high yields. Russia is looking attractive from the top-down political context, dividend yields and on the basis of valuations."
He estimates dividend yields will exceed 4 per cent for 2002, making equities look very attractive at a time of sharply declining interest rates and diminished returns elsewhere.
With the macro-economic climate sharply improved, reform measures underway, and a healthy trade and budget surplus, the Russian bond market has improved sharply on the back of rating upgrades in recent months, to the point where many analysts now see it as fully valued.
That leaves equities as the next best thing, given that they are still substantially undervalued - at least according to those based in Moscow with an interest in talking up Russia.
Mr Fenkner stresses in particular the attraction of preference shares - those Russian corporate shares which pay a substantial dividend by law, originally designed to provide income to the employees who took part in the privatisations of their companies during the 1990s.
He argues that they offer not only attractive yields as they stand but also the potential for further gains as they are restructured and converted into common stock in the future. Lukoil and Norilsk Nickel have already carried out such schemes. Surgut and Tatneft, the oil companies, as well as regional electricity and telecommunications companies, may follow suit.
Given the recent conversion to more enlightened corporate governance by the former pariah Yukos, and even signs that the gas monopoly Gazprom is seeking better value for its shareholders, there are also indications of improvement at the micro-level.
And, with the likely launch of American Depositary Shares for Wimm Bill Dann, the dairy and juices group, this month, there are signs of diversification from a very narrow base in the oil and gas sectors.
But, with the world economic outlook still uncertain, analysts warn that 2002 - and even the first half of the year - may be the final period of sharp growth for Russian equities in some time.
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