Research Notes

As a result of its performance in 1Q 2008, the RTS index lost about 10%, while the more diversified RTS-2 index lost only 6% of its value. In our view, the Russian stock market declined primarily due to pressure from unfavorable conditions on the world stock markets, and there were no inherent reasons for its fall. We believe that Russian companies have a strong growth potential conditioned by a favorable investment climate in the Russian economy and strong domestic demand, which should contribute to an inflow of investments.

In our opinion, strong world prices for natural resources, growing domestic demand in Russia and large-scale state and private investments in the Russian infrastructure are to remain the key factors which add to the investment attractiveness of the Russian economy. In these circumstances, investors are advised to invest in companies primarily aimed at satisfying internal demand. Among the potential favorites, we point out companies in the consumer sector and believe that the current trend towards a shift in consumer tastes to high-margin products should contribute to the development of all companies in the sector, from producers of consumer goods to sellers. It is becoming increasingly more evident that to sustain the current robust economic growth rates, it is necessary to build modern infrastructure that can meet the needs of the growing economy. The current macroeconomic conditions are conducive to fulfill this difficult task, as high global commodity prices ensure a stable inflow of funds into the Russian economy. Construction companies, the metal sector and metal companies stand to benefit the most from capital inflows into Russia.

We project the RTS index to stay around 2,188 points through 2Q and grow to 2,509 points towards the year-end, which implies an upside potential of 22% to the index by the close on March 31. In our model portfolios for the forthcoming period, we turn investors' attention to GAZ, a diversified vehicle and machinery producer; Wimm-Bill-Dann, a leader in the Russian dairy market, retail chain Magnit, phosphorous fertilizer producer Ammofos and the road-building company Bamtonnelstroy. We also recommend the large-scale silver mining company Polymetal, whose shares could be used as a hedge against negative tendencies in the global economy. In total, these companies' shares make up less than 29% of our model investment portfolios.

We expect yearly returns of 15% on the conservative portfolio, 21.3% on the balanced portfolio and 31.5% for the aggressive strategy. The possible reduction in their values is 5% for the conservative portfolio, 15% for the balanced portfolio and less than 30% for the aggressive strategy portfolio. The expected returns for the long-term growth portfolio are 49.4%, with limitless risks.

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