Research Notes

The RTS index gained 11.6% in 2Q 2008, having won back the turf lost in the first three months of the year. The RTS-2 index of companies with small and medium market caps rose by a more modest 4.6%. Favorable price trends on commodity markets and the new government’s decision to ease the tax burden on the oil & gas sector emerged as the main upside drivers for Russian stocks. However, uncertain conditions in the financial sector and unclear prospects for the global economy continued to exert pressure on the Russian stock market.

In our view, economies with developed resource bases are better protected from worsening global market conditions. Russia is one such economy. Amid exorbitant world commodity prices, economies of this kind are capable of sustaining robust economic growth rates on the back of surging cash inflows and strong internal demand. Accelerating inflation is the most serious problem faced by the Russian economy. As before, we believe that companies aimed at meeting domestic demand and capable of efficiently controlling their expenses have the highest growth potential. In our view, the construction sector retains its appeal for investors in fundamental terms, given the planned volume of investment in infrastructure development. In the power utilities sector, we turn investor attention to power distribution grid companies shielded from the impact of fuel costs. We also highlight shares of rapidly developing commodity companies in light of favorable price trends on commodity markets and plans to ease the tax burden on the oil & gas industry.

In line with our base projection, the RTS index is to grow to 2,354 points in the third quarter, and rise to 2,550 points by the year-end, which implies an upside-potential of 11% to the index level at the close on June 30. In our model investment portfolios for the forthcoming quarter, we single out shares in Russia’s oil major Lukoil, diversified automotive producer GAZ, the PIK vertically-integrated property developer, the Belon coal-mining company, the Silvinit and Acron potash and compound fertilizer producers and the Bamtonnelstroy road building holding company. Investors are also advised to consider buying into Polymetal, Russia’s top silver producer as a hedge against the current negative trends in the global economy. Put together, these stocks form up to 20% of our model investment portfolios.

We expect annual returns of: 14.6% on the conservative investment portfolio, 20.5% on the balanced portfolio and 29.9% on the aggressive portfolio. The possible reduction in the value of the investment portfolios is: 5% on the conservative portfolio, 15% on the balanced portfolio and 30% on the aggressive portfolio. Expected yearly returns on the ‘long-term growth’ investment portfolio are 49.2%, while the risks are unlimited.

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