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Strategies & Market Trends : Countries

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From: Sam Citron5/23/2009 8:41:08 PM
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As Economy Struggles, Russia’s Market Has Surged
By ANDREW E. KRAMER

MOSCOW — Despite continuing weakness in the Russian economy, the stock exchange here has surged to become the best performing in the world, after being the worst last fall.

After the sell-off last year pushed the valuations of Russian companies to record lows, rising energy prices in recent months have drawn investors back into the market, traders said, even as the government has twice downgraded its expectations for growth this year.

Other big emerging markets, including China, India and Brazil, have rebounded sharply in recent months on signs that the fractured global economy may be beginning to heal, but none have been more buoyant than Russia.

When the authorities reported this month that industrial output declined 16.9 percent in April, the stock market still continued a five-day streak.

“Investors are not analyzing macroeconomics when deciding whether to invest in Russia,” the chief economist in Moscow for Merrill Lynch, Yulia Tseplayeva, said.

“They look at oil prices, and believe that when oil prices rise so will the Russian market
,” she said. “And that is true.”

Officials now expect a contraction of more than 6 percent in the Russian economy before it begins to improve. Yet investors who braved the yo-yo bounce in the Russian market have profited handsomely.

The Micex index of major Russian company shares, for example, is up 105 percent after bottoming out on Oct. 27. It rose 19.66 points, or 1.9 percent, on Friday to close at 1,054.03.

For some investors, the very air of dismal news hanging over the country inspired contrarian bets in February and March that shares were oversold.

“It seemed a consensus emerged generally that Eastern Europe was going to hell,” Ian Hague, a partner at Firebird Capital Management, a New York hedge fund that focuses on the former Soviet Union, said by telephone. “When you see that, it is very bullish. Because the reality is never as bad as people’s fears.”

Firebird, after selling Russian shares in the second half of 2008, reinvested in February, he said.

But for all Moscow’s effort to diversify the economy, the rise in Russian equity values has closely tracked the price of oil, by far its largest export commodity — much as the market plunge last fall coincided with the collapse of oil prices.

In the second half of last year, oil prices declined 75 percent and the RTS index fell by 72 percent, said an investor note from UralSib, a Moscow brokerage firm. This year, crude prices have risen 59 percent and the RTS index 58 percent. The RTS is denominated in dollars and its fluctuations reflect both share prices and the ruble-dollar exchange rate, unlike the Micex.

Still, Russian stocks plunged last fall not only because of oil price declines, but also because many Russian industrialists had pledged shares as collateral for loans, and were required to sell when credit lines were called in.

Then, uncertainty over the stability of the ruble prompted foreign investors to sell shares.

By late January, however, the ruble had stabilized and the forced selling was over, eliminating two Russia-specific risks and leaving a very depressed market behind. Then oil prices ticked back up.

Money is trickling back into Russian investments. For now, the inflow has not balanced the outflow of capital as companies repay foreign banks for loans that are not being rolled over. But the new money coming in was very nearly equal to the outflow in April, according to an estimate by Merrill Lynch.

In that month, the central bank reported a net loss of $2 billion of capital. Since roughly $10 billion in loan payments came due in April, the investor inflow probably was about $8 billion for the month, the bank said.

And the Russian stock market bounce came in spite of looming troubles in the real economy that analysts say make it look tenuous.

But given Russia’s dependence on the boom-and-bust commodity price cycles, a lack of so-called long money investing in the economy and a good deal of jitters about political stability and relations with the West, Russia’s stock market probably will remain highly volatile.

In fact, since its inception after the collapse of the Soviet Union, the Russian stock market has been either in the top five performing markets in the world or the bottom five in every year except one, according to Renaissance Capital, a Moscow brokerage.
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