18 October 2003 01:51
Index up 75% this year: RUSSIA: The market is attracting plenty of investor interest, says Paivi Munter. But there are reasons for caution
Five years after its financial crisis, Russia has become a stock market to be
reckoned with.
This month, the country's equities broke through pre-crisis levels for
the first time, and the government's newly-won status as an investment
grade borrower has left investors positively buzzing.
"Russia is becoming a market that people can't ignore any
more," says Philip Poole, head of emerging market research at ING
Financial Markets in London. "The upgrade is a recognition of
Russia's recovery - systemic risk is massively reduced."
The historic move up from junk grade by Moody's Investors Service opens
the markets to a new class of investor, even though rival agencies are yet to
award Russia this status.
Moreover, BP's Dollars 6.75bn (Pounds 4bn) deal with Tyumen Oil Company
is putting the country on the map for foreign direct investment.
These developments could help share prices add to their already spectacular
gains. The RTS1 stock index has risen about 75 per cent this year, making
Russia one of the world's best performing markets. Since the lows after
the 1998 crisis, the index has risen by nearly 1,600 per cent.
The revival has been fuelled by the country's rapidly rising hydrocarbon
revenues. As world prices for oil have jumped from an average of Dollars
12.80 per barrel in 1998 to about Dollars 28.70 this year, Russian producers
have cranked up output from 6.1m barrels a day to 8.7m. This makes Russia the
world's second biggest oil exporter after Saudi Arabia.
These favourable trends have coincided with increased domestic stability
under President Vladimir Putin, whose policies have helped turn around the
state budget from deficits to hefty surpluses.
Relative calm in and around the Kremlin has allowed the owners of Russian
companies to focus on making a profit instead of stripping assets and taking
the proceeds offshore. The drive to increase asset prices has prompted
improvements in corporate transparency, although adherence to international
standards is far from the norm.
Oleg Biryulov, who runs JP Morgan Fleming's Russia Securities Fund, says
Russia has evolved from a rudderless ex- superpower to a well-managed
economy. "There is a clear business plan for Russia Inc, which there
wasn't five years ago," he says.
JP Morgan's Pounds 94m fund specialising in Russian equities, whose own
shares are listed on the London Stock Exchange, has nearly doubled in value
since its listing last December. Since its launch nine years ago - the fund
is a successor to the Fleming Russia Securities Fund - the value of net
assets has quadrupled.
Other Russian equity funds include the Templeton Russia Fund, the Baring New
Russia Fund and the Russian Investment Company run by F&C Management.
Most analysts recommend investing in funds rather than individual stocks
because it spreads risk.
Given Russia's idiosyncracies, many of the country's top-tier
companies remain virtually impenetrable to individual investors. Sprawling,
state-controlled Gazprom, for example, often appears to serve ill-defined
political interests. But the numbers are compelling: Gazprom accounts for
about one-fifth of global natural gas supply.
Provided that Russia's domestic gas prices are liberalised and
Gazprom's dual share structure is abolished, it could become the
world's biggest emerging market stock over the next five years, says
Chris Weafer, strategist at Moscow-based Alfa Bank. He explains: "It
controls about 35 per cent of world reserves, and it's much better
placed to feed the world's most energy-hungry regions than the Middle
East."
Gazprom's American Depositary Receipts, each of which equals 10
rouble-denominated shares, have this year risen 127 per cent to Dollars
26.60. The rouble stock, unavailable to foreign entities, is up some 88 per
cent in dollar terms at more than Rbs43.
Other Russian foreign-traded shares include power utility UES and mining
company Norilsk Nickel, as well as telecoms operators Vimpelcom, Golden
Telecom and Mobile Tele Systems (MTS).
But availability remains skewed towards the oil sector. Stocks on offer
include Sibneft - which is about to be taken over by rival Yukos - Lukoil,
Surgutneftegaz and Tatneft.
But oil producers make up 70 per cent of the domestic RTS1 index, and the
lack of diversity is a worry to investors. This leaves the Russian market
highly dependent on oil prices.
Russian initial public offerings are so far conspicuous by their absence and
the market's free float is declining, making investment opportunities
scarce.
With the financial system awash with oil money and the government's
credit rating upgrade likely to increase capital flows into Russia, there is
a risk of another asset bubble.
"The investment grade rating makes the supply-and-demand situation
worse," says Weafer. "IPOs (flotations) are likely to be delayed
because owner-managers of businesses can now access debt capital at
attractive rates and postpone equity financing."
Potential IPO plans are in any case likely to be on ice until after
Russia's parliamentary and presidential elections, due in December and
March respectively.
Jasper Crone, fund manager at F&C, says: "We are a bit edgy that the
market has come so far so fast. But we remain very enthusiastic in the long
term."
[FTI [The Financial Times]] |
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