RUSSIAN STOCKMARKET IN DOLDRUMS

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07/08/2008 | Moscow News №31 2008
Russian stock market in doldrums
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August is the most crisis prone month of the year. On August 9, the world will mark the first anniversary of the credit crunch and on August 17, Russia will mark the 10th anniversary of Russia's financial meltdown, popularly referred to as the default on state treasury bonds.
NOTE: ERATIC MOVEMTNT OF STOCKMARKET CREATED MAJOR LOSSES.
The Russian stock market closed in July with significant losses. During the reporting period, the MICEX Index fell by 14.68 percent. The RTS Index, which is more representative for nonresidents, was down 15 percent. The Russian stock market, which last week took a short break in its five-week fall, is so far showing the worst dynamics among the emerging markets. Nor were investors particularly impressed by Russian President Dmitry Med­vedev's call on Russian government officials, state security and law enforcement agencies to stop harassing small and medium sized businesses. Thus far nonresidents generally prefer to give the Russian market a wide berth, despite the 50-70 percent growth potential of Russia's business majors. Whereas Western corporate shares vigorously responded to the emerging "buy" incentives, Russian company quotes gloomily followed the baton of an unseen conductor who was directing the Russian stock market to move further and further down.

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An upbeat report by Arcelor Mittal, the world's largest steelmaker, as well as U.S. Steel's good performance in 2Q08, only stimulated significant growth in Russian company quotes for two days, after which cash-outs resumed. Ditto for oil company stocks. For instance, in the middle of last week, Lukoil and Rosneft shares reacted to a 2 percent growth on the oil market with a 2 percent drop in quotes.

Recession brings down the price of raw materials: This is an immutable law of the global economy. Brent crude oil prices fell 11.85 percent in July, reflecting a slowing of global economic growth, a trend that has been observed throughout the current year. Furthermore, the majority of leading indicators on the United States, Germany, Japan and Great Britain suggest that the economic situation in these countries will remain rather tense until the end of the year.

Nevertheless, U.S. and European stock market indexes did not record such a sharp fall as was observed on the trading floors in Russia and Brazil (the Bovespa index was down 9 percent in July). India's BSE Sensex index even added 5 percent last month.

It seems that the big speculative capital of such behemoths as JPMorgan Chase, Lehman Brothers, and Merrill Lynch influences the situation not only on securities and commodities ex­changes, but also on raw materials markets. A couple of weeks ago, Russian investors were overwhelmed by the slump on the domestic stock market amid a generally positive external environment. That was followed by media reports of a major cash-out on Russian shares by a global Western player. Needless to say, all attempts by domestic investors to buy falling shares with an eye to their high growth potential come up against new waves of cash-outs by nonresidents. This game is won by the party that has more money.

The hopes that Russia will become a safe haven for foreign capital amid a deepening global economic crisis are fading. The entire history of world crises shows that at such moments, investors pull out money from emerging markets and reinvest it in U.S. treasury bills. In this case, Russian market players just need patience and hope that the falling prices of raw materials will increase their consumption, which, with low interest rates in developed economies, will help restore economic growth, consumer confidence, and investors' trust in the Russian stock market. In August, we are likely to see RTS and MICEX indexes tumble to the spring of 2006 lows.

By Alexander Potavin

Analyst, AntantaPioglobal Investment Group

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Moscow News №31 2008 (7th of August, 2008)


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