Research Notes

In July-September 2006 the Russian equity market showed heightened volatility which was largely in line our expectations. As before, stock valuations of domestic plays were primarily impacted by geopolitical issues (the Israeli-Lebanese conflict and uncertainty around Iran’s nuclear program), the outlook for the Fed’s interest rate hikes and rate-hike action by European leading central banks, as well as volatility on petroleum and metals markets. We are of the opinion that rising risks of global economic cooling will continue to exert further impact on primary markets, as a result of which stocks of companies which are focused on stably growing domestic demand are becoming more attractive.

In our view, robust prospects are held by stocks of companies which operate in the public utilities sector (nuclear and thermal concerns), as well as hydropower plants, consumer, chemical and petrochemical entities. In our strategy report for July-September (Summer Races – Bets Are on Second-Tiers!) we focused mainly on portfolio diversification by sectors and raised the portion of second-tier stocks in our portfolio. This choice proved to be correct, since the RTS Index gained 3.7% in July-September, the RTS-2 benchmark advanced by 11.9%, whereas stock segments of our model portfolios jumped 12.7% to 14.5%. For the latest period we revised the risks of investing in stock segments using available data about management of actual portfolios. The proposed asset breakdown in our portfolios is shown below.

	Conservative	Balanced	Aggressive	Long-term growth
Bonds	70%	50%	19%	0%
Shares:	30%	50%	81%	100%
including blue chips	18%	25%	35%	0%
including second-tier stocks	12%	25%	46%	100%
	100%	100%	100%	100%

Asset distribution by segments of model portfolio stocks:

On an annualized basis, our portfolios are expected to return 17% for the conservative portfolio, 23% for the balanced portfolio and 32% for the aggressive strategy. Possible reduction in the value of portfolios is 5% for the conservative portfolio, 15% for the balanced portfolio and 30% for the aggressive strategy. Returns under the long-term growth strategy are projected at 44% with a 100% risk factor.

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