WEEK IN REVIEW:
Summary for week and of June 15 - 19:
The Russian Trading System (RTS) continued its downward slide, though at a much slower pace than the previous week. Stocks started the week on a sour note, when on Monday the RTS index plummeted 7% due to concerns that international financing would fail to materialize. Russian shares did manage to rebound over the next two days but then drifted the rest of the week. The RTS index ended the week at 174.65 for a 2% loss.
Trading volumes were up from the previous week but still only averaged $43 million on a daily basis. Unified Energy Systems dominated trading as it accounted for 51% of the total. LUKoil was responsible about 16% of turnover. Mosenergo represented 10% of the volume, while Rostelecom placed fourth with 6%. Among total RTS listings, declining issues outnumbered advancing issues 2:1.
Russian oil stocks continued to struggle amid decreasing oil prices
on world markets and uncertainty in Russia. LUKoil (LKOH)
was relatively unscathed in relation to other major oil producers as its
share price slipped only 1.8% to $9.35. YUKOS (YUKO)
gave up almost 3% as it slid to $1.17. Surgutneftegaz
(SNGS) dropped 6.7% to $0.09. Tatneft (TATN) was once again
one of the worst performing oil stocks as its price fell 9.6% to $0.427.
Energy companies rebounded from the previous week to outperform the
market this week. Sverdlovskenergo (SVER) led energos with
an 18.4% jump. Lenenergo (LSNG) gained 6%. Bellwether
Unified Energy Systems (EESR) added 5.5% to $0.17. Mosenergo
(MSNG) edged 1% higher to $0.064. On the negative side, Irkutskenergo
(IRGZ) and Samaraenego (SAGO) lost 7.3% and 9.8%, respectively.
Telecommunication companies posted mixed results. To the positive extreme was Altai Electrosvyaz (ESAL), which soared 60%, though the sharp increase primarily reflects the shares' illiquidity. Among leading providers, Russia's long distance monopoly, Rostelecom (RTKM), added 1.2% to end the week at $2.48. The larger regional telecoms, Uralsvyazinform (URSI) and St. Petersburg Telecom (SPTL), surrendered 1.5% and 3%, respectively. Moscow City Telephone (MGTS) fell 6.3%. Novosibirsk Electrosvyaz (NVTL) was one of the worst performing communication companies as it plummeted 28%.
Automotive companies faired poorly against the broader market. Gaz Auto Plant (GAZA) fell back under the $100 mark to $97, a 5.8% loss for the week. Pavlovski Avtobus (PAZA) tumbled 6% to $16. KAMAZ (KMAZ) sunk 25%.
Among other leading companies, Aeroflot (AFLT) surrendered 10%
to $84. Sber Bank (SBER) shed 3.6% to $121.5. Shares of Norilsk
Nickel (NKEL) descended almost 8% to $2.40.
Less liquid companies were quite volatile even though very little trading
actually took place among second and third tier issues. The reason
for their volatility was a sharp increase in spreads, due primarily to
a significantly lowering of "bid" quotes.
WHAT TO WATCH:
Forecast for week of June 22 - 26:
After falling 42% for the month of May, the index for the Russian Trading System (RTS) fell another 8.7% over the first half of June. Some investors consider Russian shares to be extremely cheap at current levels, especially when compared to the all time highs that were reached early last fall. However, the majority of investors still point to a long list of concerns that could further delay fiscal reforms and obstruct economic growth. It is these numerous problems that not only surfaced concurrently during May and carried into June, but that obliterated investor confidence in Russian capital markets. At least government officials have finally admitted that they need $10-15 billion agencies as "standby" reserves from international lending.
Ironically enough, very few of the problems that appeared over the last month and a half could be considered new. Concerns over tax collection, political instability, wage arrears, and shareholders' rights sound more like a broken record than anything else. To be more precise, the International Monetary Fund (IMF) has on numerous occasions delayed loan disbursements due to poor tax collection. Miners aren't the only group to have staged strikes over the lack of wage payments. The decision to limit foreign ownership in Unified Energy Systems is definitely not the first time that concerns over shareholders' rights have transpired. However, in the past, such issues were either better concealed or surfaced independently.
Since it was essentially the same old, unsolved problems that led to the market's demise, one has to wonder how Russian shares achieved such spectacular returns in 1996 and 1997. Among the factors most commonly cited are 1) investment companies enjoyed incredible returns in government securities during 1996 and shifted much of their earnings into the equity market. 2) Illiquid shares and large spreads lead to a sellers' market amid increasing demand. 3) New money from foreign investors arrived into a small market, thus substantially increasing both demand and prices. 4) Popular reform figures were nominated to key government positions. 5) A certain "craze" spread over investors who felt that they had to participate in Russia's roaring stock market. Russian shares will eventually return to record levels. However, the conditions supporting a rise and the length of time should be drastically different than before.
In the short-term, the Russian market is likely to remain highly speculative and volatile. All attention seems to be focused on external developments, not the underlying economic fundamentals, which are arguably improving. Investors are still hoping for quick remedies via the IMF, World Bank, additional Eurobond issues, and leading Russian banks and enterprises. The immediate concerns are to stabilize the situation and to take further pressure off the ruble. The market's volatile performance over the first half of June reflects nothing more than anticipation (or lack thereof) that international financing sources will come to the rescue. Future market movements will be dictated by the size of a "rescue" package (if one does arrive) and how it is put to use.
Long-term value investors (a.k.a. - portfolio managers with deep pockets) are likely to stay on the sidelines for at least the next few months. Prime Minister Kiriyenko and his new governments won't be able to repair everything immediately, even though his team appears determined to tackle problems head on. It remains to be seen if the new government can push its policies through Russian bureaucracies and opposition forces. However, the reformers can solve one problem at a time while making headway on other pressing issues. Now that the majority of key concerns have been identified and acknowledged, investors can keep a checklist of the reformers' progress and decide at what risk level they are willing to venture back into the Russian stock market. Concrete measures to structurally improve Russia's economy will be the key as to whether the market has bottomed out or has even further to fall.
Jeffrey Hyde
OPM-BANK
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