Research Notes

Low-liquidity portfolio

Our low liquidity portfolio surged 40% over the last three months while the RTS index rose 24% during the same period.

Low liquidity shares met our expectations especially during the past two weeks (their upside for this period was 17%), while the top gainers were utility shares. It is hard to say whether it was our recommendation that made Krasnoyarskenergo, which we actively promoted last month, the top gainer (+49%).

Both our first TGC report in October and the second one in November attributed strong investment appeal to regional energos. Yet now the potential of many shares in this sector is flat. Regional energos and GES have outperformed our optimistic expectations and energo shares now look overvalued. Nevertheless, our portfolio weightage of utility shares remains high, although we have restructured it.

Second-tier oil shares have not lived up to our expectations so far, yet we believe low liquidity oils, as well as blue chips, could remain overvalued.

We are upgrading the consumer sector in our model portfolio, while downgrading such energos as Votkinskaya GES, Krasnoyarskenergo, and Stavropolenergo due to their outperformance, and adding a new energy company, Arhenergo (see our latest Desk Note on the outlook for Arhenergo).

In consumer sector we partially reduce Baltika’s weightage, but raise Red October (see our recent Desk Note on Red October).

Our model portfolio has surged 57% since November 25, 2003, while by contrast benchmark RTS gained 30% over the same period.

We are revising the weightage of second-tier oil shares in our portfolio following the release of our new Desk Note on Rosneft. But we leave unchanged the weightage of some of TNK-BP’s subsidiaries, switching from commons, which are significantly up, to prefs.

We are downgrading power facilities in our low liquidity model portfolio. The surge in market caps of most energos has curbed investment opportunities in that segment. In our opinion, the current valuations of many regional energos are sufficiently high to exit them altogether. We have deleted Stavropolenergo from our portfolio and are cutting back on some other utility companies.

We also removing Baltika from our portfolio, since its shares have almost reached their target price, but we retain other consumer stocks.

Nevinnomyssky Azot, which we long recommended, has also been discarded. Its stock has approached our target range, although we are keeping another chemical asset in our model portfolio.

We also maintain a fairly high cash weighting in our portfolio in order to make way for some new companies, in line with our upcoming Desk Notes.

Sergey Arinin

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