#23 - JRL 9076 - JRL Home
From: "James Beadle" <jamesdbeadle@yahoo.co.uk>
Subject: Buy The Bouncing Bull
Date: Thu, 3 Mar 2005
Buy The Bouncing Bull
By James Beadle

Seven trading weeks into the year and the RTS has climbed 16%. The major triggers of this impressive rally have been S&P's investment-level upgrade, which took the market into the high 600s, and the US court's somewhat predictable decision not to challenge the Russian government by providing bankruptcy protection to Yukos.

Such a bullish performance, backed by Sistema's successful IPO in London and the emergence of TNK-BP as a potential world-class oil play, is a far cry from the negativity of New Year. The president has moved to tame the back-tax beast, the Moscow Times is reporting a record surge in business confidence in February, and Gazprom has confirmed its plan to acquire Rosneft, clearing the way to finally eliminate the ring-fence. True, Yugansk will be left out, stopping the deal short of fully compensating the value lost in Yukos - and so breaking the implicit offer Putin made at the start of the whole debacle - but the transaction is sufficiently positive nonetheless.

The bulls are back in town then? It would seem so, but how much has really changed, and where can we expect the market, ergo fair value, to settle over the coming weeks?

Russian equity prices have been bouncing about like tiny boats in a raging storm ever since Khodorkovsky was first arrested. And fairly so: Russia, at the time, was an accelerated development play, an emerging market in the literal sense of the term. Political stability, improving corporate governance and high commodity prices abound.

No surprise that equities tanked on the arrest of the nation's leading capitalist and the diabolical execution of its most developed company. But why have they been bouncing rather than just plummeting? Oil prices and a reassuring grasp of history provide the answers. As successful has Khodorkovsky's international media campaign has been, the scars of previous misdemeanours remained, along with a sense of injustice at his post-Soviet achievement.

So, equity prices have been fluctuating, but they have been doing so at the higher ends of historical trend. The investment community remains broadly sold on the idea of Russia's future. Sold enough to keep buying? There are downsides, but on balance it would seem so.

The current cabinet split, pitting the liberals against the Prime Minister, is cause for concern. Putin's allegiance with Chavez and the unnerving strength of benefit reform protests give credence to Fradkov's populist tendencies, and the longer the stability fund sits there the harder it will be to protect.

Yukos is not done shaking the tree yet either. While the company's defence is essentially over, it would be reasonable to expect a few desperate blows to accompany its dying breaths; and the government for its part seems set to drag on with protracted asset seizure.

Finally, relative to its post-default trend, the RTS is already 10% overvalued: Long-term price stability is already to the downside.

Risks remain, but hopes too. Kasyanov's emergence as a potential presidential candidate is a driver. The barrage of comments about how the Kremlin will undermine his credibility provides a degree of protection, so does the content of his message - democratic and inline with the president's own sentiment, as voiced the same day. Either way, his return to the political arena is a welcome sign of diversity.

Fair value cannot fail to learn from the past 18 months, which have exposed the legal vacuum upon which the previous asset price peak was built. The long-term trend-line will not shift quantitatively without those flaws being addressed, but with prices back in such bullish territory more Russian business leaders will be looking to cash out, and short-medium term drivers play a part too.

The RTS is anchored above 700 and it will take a weighty blow to break that floor. Commodity prices, currency appreciation, liquidity and posturing for the Gazprom-Rosneft merger imply upside, but, without clarification of the property rights be ready for the market to keep bouncing back.