Research Notes

In 2006 the Russian equity market has continued its ascent towards new highs. In the first three months of 2006 alone benchmark RTS Index surged 27%. In Q106 the benchmark made two attempts at a correction after which the market resumed its relentless upward drive. By the time this research report was on its way to print we saw no factors capable of generating sustainable growth for the stock market as a whole. That said, we believe that favorable conditions will continue to prevail, buoying stock valuations at their current levels further down the road. We see major upside potential in non-primary stocks in Q206.

After careful consideration we restructured and reweighted our portfolio asset distribution for the upcoming period. For example, the proportion of stocks was raised compared to previous portfolios. However, the metrics for a sharp possible decline in portfolio returns remain unchanged, i.e. no more than 5% for the conservative portfolio, 15% for the balanced portfolio and 30% for the aggressive portfolio. Moreover, we present a new type of aggressive portfolio – "long-term growth". Investing in this portfolio carries special risk exposure and this strategy will work for investors willing to take on investment risks for an indefinite period of time. Longer term, the expected returns from such a portfolio will be higher, although a sizeable contraction in the value of the investment portfolio is certainly within the realm of possibility.

On an annualized basis, our portfolios are expected to return 20% for the conservative portfolio, 27% for the balanced portfolio and 39% for the aggressive strategy. The possible decline in portfolio value could be 5% in the conservative portfolio, 10% in the balanced portfolio and 15% in the aggressive portfolio. We’re forecasting 50% value accretion on long-term investment horizon with risk exposure equal to 100%.

Returns under the long-term growth strategy are projected at 50% with a 100% risk factor.

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