Research Notes

The Russian equity market confirmed its volatile EM status in the second quarter when a 10-month powerful rally reversed in mid-May into a deep correction which was sparked by foreign cash outflow from emerging markets on fears of further rate increases by US FRS and other leading international central banks. Although downside risks remain, we believe that current price levels of Russia stocks are already attractive for mid- and long-term investments. At the same time, existing risks could sustain heightened market volatility in the months to come.

As major institutional investors have become less tolerant to the risks, speculative factors are putting more pressure, which heightens stock investment risks. According to our methodology for formation of model portfolios, based on the risk/yield ratio of the Russian equity market, we made revisions in our recommended portfolio structure. The portion of bonds in conservative portfolios rose from 71% to 76%, grew from 51% to 60% in the balanced strategy and spiked from 22% to 36% in the aggressive portfolio. Along with placing blue chips in our model portfolios, we also included second-tiers and greenfields and believe that the optimal strategy is to follow the final structure of our model portfolios, which we determined using potential risks associated with pronounced volatility on the Russian stock market.

On an annualized basis, our portfolios are expected to return 5% for the conservative portfolio, 10% for the balanced portfolio and 15% for the aggressive strategy. Returns under the long-term growth strategy are projected at 53% with a 100% risk factor.

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