Research Notes

October –December 2007 Strategy:

A Time for Promising Acquisitions in 2008

Even though crude prices have climbed significantly since the beginning of 2007 (with Brent up 35%), the Russian stock market, which foreign investors view as overly exposed to commodities market conditions, only advanced marginally, with the RTS Index adding less than 8%, unlike other EM stock indexes. Specifically, the Chinese market gas added 107% YTD. However, assuming that the monetary policy of the US and foreign central banks most likely remains unchanged, EM stocks will see sustained demand. In Q407, we expect resumed interest of foreign investors in Russian shares. Apart from high commodities prices, the reasons behind renewed demand for Russian equities include robust economic growth, ongoing industry reforms, ruble appreciation, a consumer boom and vibrant potential of further growth in domestic demand.

In our opinion, commodities stocks will enjoy the strongest demand in Q407, since they are mostly represented on the equities market, and stocks in industries targeting domestic consumption. In Q407, we expect to see resumed demand for base metals, in particular, nickel, zinc and gold. Further trends in base metal consumption will be predominantly determined by sustained demand on the part of rapidly growing economies in China and India. What’s more, precious metals could be additionally propped up by investment demand rather than industrial demand. Metal stocks, which stand to gain from stronger demand for base metals, range from 10% to 16.7% of our weightings in the recommended portfolios.

In addition to blue chips, when securities portfolios are established, we recommend also including in portfolios less liquid stocks of mid- and small-cap companies.

	Conservative	Balanced	Aggressive	Long-term growth
Bonds	76%	58%	33%	0%
Shares:	24%	42%	67%	100%
Including blue chips	16%	21%	22%	0%
Including second-tiers	8%	21%	45%	100%
	100%	100%	100%	100%

Asset distribution by segments of shares in our model portfolios is as follows:

	RTS ticker	Conservative	Balanced	Aggressive	Long-term growth
Gazprom	SBER	13.3%	10.0%	6.67%
Sberbank	GAZP	13.3%	10.0%	6.67%
Norilsk Nickel	GMKN	13.3%	10.0%	6.67%
MTS	MTSS	13.3%	10.0%	6.67%
UES (prefs)	EESRP	13.3%	10.0%	6.67%
Gas	GAZA	1.7%	2.5%	3.33%	4.00%
Saturn	satr	1.3%	2.0%	2.67%	4.00%
Tver Wagon Plant	tvag				6.00%
Siberia Telecom (prefs)	ENCOP	2.3%	3.5%	4.67%	5.00%
Volga Telecom (prefs)	NNSIP	2.0%	3.0%	4.00%	4.00%
ChTPZ	CHEP	1.0%	1.5%	2.00%	4.00%
Polimetall	PMTL	1.3%	2.0%	2.67%	4.00%
Electrozinc	eltz	2.0%	3.0%	4.00%	6.00%
Magadanenergo	MAGE	2.0%	3.0%	4.00%	6.00%
Arhenergo (prefs)	ARHEP	1.7%	2.5%	3.33%	5.00%
Tomskenergo	TOME	1.3%	2.0%	2.67%	4.00%
Chepetsk Mechanical Plant (pref)	cherp	1.3%	2.0%	2.67%	5.00%
Ufaneftekhim	UFNC	1.7%	2.5%	3.33%	4.00%
Ammofos	ammo	2.0%	3.0%	4.00%	4.00%
Amtel-Volga	kirt				4.00%
Tveroblgaz	tveo	2.3%	3.5%	4.67%	6.00%
Kalina	KLNA	2.0%	3.0%	4.00%	4.00%
Lebedyansky	LEKZ	1.7%	2.5%	3.33%	3.00%
Bamtonnelstroy	btst	1.7%	2.5%	3.33%	4.00%
Glavmosstroy	gmst				5.00%
Lengazspetsstroy	legs	2.3%	3.5%	4.67%	5.00%
Iskitimcement	iskc	1.7%	2.5%	3.33%	4.00%
Total:		100%	100%	100%	100%

Projected returns amount to 18% for the conservative portfolio, 30% for the balanced portfolio and 49% for the aggressive strategy. Chances of a decline in portfolio value are 5% for conservative portfolio, 15% for balanced portfolio and 30% for the aggressive strategy. Expected return on the long-term growth strategy is 87% and risks are not limited.

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