Russian stock market has been body slammed over the last few weeks due to Russia’s conflict with Ukraine/West. Losing 25% of its value in just 20 trading days. Yet, over the last 4 trading days the market is up 12%. Russian billionaires are buying hand over fist (see the article below), the valuations are very low and the conflict is likely to be over. Is it time to buy?
Not yet. I will admit that the Russia stock market is substantially undervalued (unlike it’s American counterpart). The conflict in Ukraine is likely to be over and no real economic sanctions will fly against Russia. Yet, here is what’s stopping me.
- The RTS Index has been in a technical downtrend since 2011. While we might get a technical bounce from today’s lows it will take a lot more for the bear market to reverse itself.
- The RTS collapsed 75% during the financial crisis and the bear market of 2007-09. Our mathematical and timing work indicates that the US will have a severe bear market between 2014-2017. If so, Russian market is likely to continue with its downtrend.
As such, it is a little too early to invest in the Russian market at this stage. Further downside is highly probable. However, if the market is able to reverse it’s bearing trend, it might make sense to reconsider. Fun fact, the Russian market is still up 2,600% from 1998 crisis bottom.
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Russian Billionaires Buying Russian Stocks. Should You? Google
Russia Billionaires Buying Stock as BofA Says Bottom Near
Two of Russia’s top billionaires are taking advantage of the bear-market collapse to buy back shares on the cheap.
Vagit Alekperov, chief executive officer at oil producer OAO Lukoil and Russia’s 11th-wealthiest man, has stepped up his purchases of the stock, buying $147 million in the first quarter, according to data compiled by Bloomberg. Mail.ru Group Ltd. (MAIL), the Internet company controlled by Alisher Usmanov, Russia’s richest man, said yesterday it plans to buy $45 million of its own stock.
Lukoil and Mail.ru have each fallen more than 14 percent this year inLondon share trading as President Vladimir Putin’s bid to prise the Crimea peninsula from Ukraine spurred concern Russia’s economic slump will deepen. TheMicex (INDEXCF) Index, the benchmark in Moscow, rebounded 8 percent in the last two days after sliding into a bear market last week. Bank of America Corp. said yesterday that stocks “could be nearing the trough” of the rout.
“Buybacks by Russian companies will be substantial because valuations are extremely attractive and the companies generate a lot of cash,” Mattias Westman, the chief executive officer of London-based Prosperity Capital Management Ltd., which manages about $4 billion in Russia and other former Soviet countries, said by phone. “The market is rallying as it seems Russia has no plans to split up Ukraine. There are still some risks, although further sanctions against Russia will most likely be cosmetic.”
OAO Lukoil Chief Executive Officer Vagit Alekperov.
Novatek, Rosneft
Mounting concern that the U.S. and Europe will impose economic sanctions on Russia following its annexation of Ukraine’s Crimea peninsula has sent valuations for the Micex to the lowest since May 2012. Mail.ru plunged 18 percent this year while Lukoil declined 15 percent. Bank of America Corp. said yesterday that “the market could be nearing the trough of the selloff.”
OAO Novatek bought 2.5 million shares between March 11 and March 14, according to a March 17 statement. The company resumed its share buyback program as the “current share price significantly diverges from the intrinsic value,” Chief Executive Officer Leonid Mikhelson said.
OAO Rosneft’s CEO Igor Sechin and top managers bought the oil producer’s shares after the drop, the company’s press service said by phone. Rosneft slumped 3.9 percent last week.
Cheapest Valuations
The Bloomberg Russia-U.S. Equity index of the most-traded Russian shares in the U.S. rallied the most in two weeks, increasing 4.1 percent to 83.44 in New York yesterday. Yandex NV (YNDX), Russia’s biggest Internet company, jumped 6.7 percent to $32.03 and trimmed this year’s decline to 26 percent. The Market Vectors Russia ETF (RSX), the biggest U.S. exchange-traded fund that holds Russian shares, surged 4.7 percent to $23.51, the biggest gain since July.
USM Holdings Ltd. Owner Alisher Usmanov.
The Micex decreased 0.7 percent to 1,326.32 by 5:42 p.m. in Moscow, taking its drop this year to 12 percent. The gauge is the cheapest among 21 developing countries monitored by Bloomberg, trading at 4.8 times estimated earnings. That compares with a valuation of 14 for India’s S&P BSE Sensex Index and of 9.1 for Brazil’s Ibovespa.
Mail.ru rallied 11 percent to $36.70 in London yesterday, gaining the most since August 2011, while Lukoil added 3.5 percent to $53.30. Mail.ru traded at 19.7 times estimated earningsyesterday, rebounding from an eight-month low of 17.5 on March 14. Lukoil traded at a multiple of 4.1, up from a 20-month low of 3.8 reached on March 3.
Military Phase
Usmanov, with a net worth of $17.5 billion, ranks 42nd worldwide on the Bloomberg Billionaires Index. Alekperov, with $10.3 billion, ranks 113th globally, according to the gauge.
Oleg Tinkov, founder of consumer bank TCS Group Holding Plc., criticized fund managers in January for acting as “speculators” after his company’s stock plunged 28 percent in the month.
Ukraine’s government said its conflict with Russia has entered a military phase as clashes in the breakaway Crimea region intensified, killing at least one Ukrainian serviceman. Western leaders condemned Putin’s push to annex Crimea and promised further sanctions as early as this week.
“We don’t know what the responses are going to be on the political side, and that creates a lot of uncertainty,” Bryan Carter, portfolio manager at Acadian Asset Management, said in an interview at Bloomberg headquarters in New York yesterday.
Tensions are increasing after Putin signed a treaty annexing Crimea into the Russian Federation yesterday. The Black Sea peninsula in a disputed March 16 referendum voted to leave Ukraine and join Russia.
‘Bottom Fishing’
“There is bottom-fishing going on,” Vladimir Osakovskiy, chief economist for Russia and theCommonwealth of Independent States at Bank of America Corp. in Moscow, said by phone yesterday. “The outlook for the market will depend on the type and intensity of further sanctions. If we are talking real economic sanctions, those that would restrict trade and cut access for Russian companies to international capital markets, then we would see a new bottom. The risk is still there.”
Mail.ru agreed to buy 12 percent of Russia’s biggest social network VKontakte, raising its stake to 52 percent, and started to buy $45 million of its own stock in an employee incentive program, the company said in statements yesterday.
“The volatility in the markets caused by political events allowed the employee benefit trust an opportunity to buy stock at what we consider a good valuation,” Mail.ru’s Chief Financial Officer Matthew Hammond wrote in an e-mail yesterday from Dubai. The program “looks to buy GDRs in the market when we consider it a good price,” he said.
Lukoil Purchases
Alekperov’s purchases of Lukoil stocks in the current quarter compares with a total of $93 million in the same period last year, data compiled by Bloomberg show.
Lukoil’s press service and investment relations department were unable to comment on whether Alekperov plans to further increase his stake in the company when contacted by Bloomberg News by phone and e-mail after normal business hours in Moscow.
The RTS Volatility Index, which measures expected swings in the index futures, decreased 3.1 percent to 45.62 today and RTS index futures rose 0.3 percent to 113,390 in U.S. hours.