Moscow Times
May 23, 2006
Stock Market Loses 9% of Value
By Yuriy Humber
Staff Writer
The stock market lost almost $62.6 billion in value on Monday, as the global sell-off in emerging markets continued into its third week.
The benchmark RTS Index fell to 1,318 points -- a 9 percent fall for the day and a 25 percent drop in just more than two weeks from its all-time high of 1,766 points on May 6.
The ruble-denominated MICEX briefly suspended trading at 6:30 p.m., after its combined share index had lost more than 8.5 percent. The bourse resumed trading an hour later.
By the close of trading, the stock market weighed in at $629.3 billion in value.
The country's largest company by market capitalization, oil and gas giant Gazprom, led the fall, shedding one-eighth of its value in one day as investors eschewed riskier assets amid rising global interest rates and slipping commodity prices.
"We're having a massive panic globally after a fabulously strong market," said Al Breach, chief strategist at UBS. "This is nothing to do with the fundamentals."
He added that investors, especially hedge funds, were losing their appetite for risk.
As central banks across the globe look to raise interest rates to tamp down economic growth and inflation, the cost of borrowing increases. In this environment, Breach said, riskier assets do badly.
The latest panic in emerging markets started in Mumbai after its stock exchange lost 10 percent in value Monday before trading was halted. The Mumbai market's value plummeted 10 percent in two days last week to $657 billion. India's police are on suicide watch, Reuters reported. (See story, page 17.)
As the news from India reached Russia -- on the heels of slumping metals prices in Asia -- domestic markets began tumbling. Within hours of opening, they had lost 5 percent of their value.
By the close of trading, Gazprom's share price had dropped 12.1 percent on the dollar-denominated RTS exchange and 12 percent on the MICEX bourse. Its London-listed depositary receipts had sunk in value by about 5 percent.
The country's oil majors followed, with both LUKoil and Surgutneftegaz losing more than 8.8 percent and 11.1 percent on the RTS, respectively; both fared slightly better on the MICEX.
Shares of the country's biggest lender, Sberbank, fell by 12.4 percent. UES energy utility's shares fell by nearly 9 percent on the RTS.
No major stocks gained ground Monday.
Analysts were quick to note that the stock market drop had little to do with Russia's financial situation, with the country in its eighth successive year of economic growth.
"It is global factors that play the major role," said Yaroslav Lissovolik, chief economist with Deutsche UFG.
Iran's standoff with the United States over its uranium-enrichment program, Venezuelan threats to halt oil shipments to the United States and to sell fighter jets to Iran, and U.S.-Russian tensions contributed to the global sell-off, they said.
Also, higher-than-expected inflation rates in the United States and Western Europe played a role.
If, as expected, the U.S. Federal Reserve raises interest rates to counter inflation, the value of U.S. Treasury bills will go up -- making riskier markets in Russia, India, China and Brazil, for example, comparatively less appealing, said Yulia Tseplyayeva, an ING economist.
But high oil prices may keep some investors in Russia, Tseplyayeva said.
And the Central Bank is likely to boost liquidity to stimulate spending and economic growth, Lissovolik said.
One key question is how much liquidity -- meaning how much money is loaned to banks -- the Central Bank will tolerate, he said.
President Vladimir Putin said in his state-of-the-nation address earlier this month that Russia would liberalize capital accounts, a way of freeing the flow of money in and out of the country to bring greater liquidity to banks and markets. Putin said that would take place this summer, six months earlier than planned.
What's more, the Central Bank is expected to raise interest rates in the second half of the year, and to allow the ruble to strengthen against the dollar and the euro -- all of which would potentially stem the stock market slide.
A stronger euro will benefit Russian exporters, most of whom target West European markets, Lissovolik said.
Finance Minister Alexei Kudrin predicted in a weekend television interview that inflation would hit 9 percent by the end of the year, a half-percent higher than the government had sought. "To keep inflation below 10 percent, a strengthening of the ruble is something the Central Bank cannot do without," Lissovolik said.
This month's market drop ranks as the second-biggest slump in RTS history after the April 2004 slide, when the market fell 34 percent after news broke that authorities were investigating oil giant Yukos for tax evasion.
Breach, of UBS, still counts Russia as a bull market and expects a rebound in stock prices.
The market, after all, has grown by 50 percent since the start of the year. The recent correction, investors said, should be viewed in that context.
Also, the dramatic rise in stock prices in the past five months has left many investors wondering if stocks were overvalued. With the correction, many stocks now look more appealing.
"You look at Gazprom now and think, 'Is this the time to buy again?'" Tseplyayeva said. "It's looking attractive again."