Research Notes

Low-liquidity portfolio

Alexei Soloviev
soloviev@finam.ru
(095) 204-8275

These steep declines once again underscore that low liquidity shares, which undoubtedly correlate with blue chips, which powerfully affect the benchmark, have proved to be less sensitive to the emotional side of speculative rumor-backed trading. From time to time, the country’s stock index has been negatively impacted by rumors, as was the case when NorNickel core shareholder Vladimir Potanin was summoned to the Prosecutor General’s Office and hastily left the country, and also by overall macroeconomic tendencies.

Since our last revision of the model portfolio (see our Desk Note, dated March 11, 2004), the benchmark has dipped 14.4%, while our model portfolio has shed 6.67%.

We would like to note that shares in machine builders (Elsib and Red Boilermaker), which account for the bulk of our low liquidity portfolio, have added on 15% and 11%, respectively, since early March, thereby pushing the entire portfolio index up 4%. On the back of a continuing downward spiral on the market, regional stocks (Krasnoyarskenergo, Permenergo and Arhenergo) have also performed pretty well.

Meanwhile, sagging stock quotes of oil companies, namely subsidiaries of TNK-BP and Rosneft, are quite explainable, factoring in the total lack of clarity around their switch to a single share.

What’s more, one should factor in the traditionally high liquidity of oils and escalation of the Yukos affair, which has impacted the oil sector and the Russian market as a whole.

The protracted correction and slimming capitalization of most Russian companies can be attributed to a raft of factors, among are the most significant, which continue to exert pressure on the Russian equity market. They are as follows:

• Overheated nature of the Russian market (benchmark RTS surged 33% over the first four months of the year).

• an anticipated interest rate hike by the Federal Reserve System, which has forced foreign investors to reassess their risk tolerance and EM yields and, consequently, caused a massive outflow of foreign capital from the country’s stock market.

• The revocation of Sodbiznesbank’s license by the Central Bank of Russia underscored fears of a latent banking crisis in Russia, which produced a negative impact on the domestic inter-bank lending market.

All in all, despite prevailing instability of the ruble liquidity, capital outflow, traditionally sluggish trading on the eve of the summer vacation season, chronic delay in power industry reforms, as well as market players’ unjustified expectations to see a clearer picture of liberalization of Gazprom shares, we leave the structure of our low liquidity portfolio unchanged.

Further down the road, we maintain that given the favorable macroeconomic situation, persistently high commodity prices, namely for crude oil, state authorities could be less interested in fanning the flames around embattled oil major Yukos. Moreover, S&P’s long-awaited assignment of a sovereign investment grade to Russia would prompt investors to take a greater interest in second- and third-tiers which offer the greatest amount of liquidity.

Our clients are entitled to obtain the full version of research reports and consult our equity research experts on how to devise an investment strategy and structure portfolios. For more information, please email Tsarev@finam.ru or call Tel: + 7 095 796-9021; + 7 095 796 9388 ext.266 Fax: + 7 095 204 8107and ask for Victor Tsarev.

Aleksey Soloviev

* Short overviews of equity research reports and sector reports are posted on the website http://www.finamrus.com with a 1-day delay after their full versions are emailed to the company’s clients. To get overviews on the day of their release, please contact your manager at Finam to sign up for full versions of research reports.