From: "James Beadle" <jamesdbeadle@yahoo.co.uk>
Subject: Shrewd Marketing Moves And A Benign Global Picture Save The Day
Date: Tue, 30 Aug 2005
Shrewd Marketing Moves And A Benign Global Picture
Save The Day
By James Beadle, 30 August 2005
Emerging asset classes have continued to defy gravity in August, despite the dollar’s strengthening on a series of near certain US interest rate hikes. Russia has ridden wave splendidly, avoiding its trademark August disasters and maximising the benefits of a benign global picture with some shrewd marketing.
At long last, the rally everyone has been waiting for. With stellar commodities prices locked-in for the foreseeable future, it was never in question that the market would brush the Yukos affair under the carpet. If anything, it is only surprising that it took so long; testament, perhaps, to the weight of Menatep’s international campaign for justice, and to administration’s determination to execute the worst-case scenario.
But while the more honest investors sank into despair and development-oriented economists scratched their heads at the absurdity of the situation, the government quietly plucked an ace from its sleeve.
Time for a pro-market campaign to lure back investors? Of course, but why fight your own battles when someone else can do it for you? Far better to buyout a friendly oligarch and win on multiple fronts: Consolidate control of the energy sector, demonstrate adherence to “market principals,” satiate (temporarily at least) the egos of a couple of the more ambitious siloviki and win over the largest, wealthiest group of pro-market campaigners to sell your virtues internationally.
There is no greater market economy proponent than the investment banking community, and none that is easier to sway: Market values are well and good, but cash, as they say, is king. Investment bankers are fiercely loyal, to one if not the other. The irony of this marriage-of-convenience, brought about with a series of high fee paying corporate deals over the past months, is that the bride knows perfectly well that the groom is a rogue, yet will cry out in innocence at first sign of betrayal.
Meanwhile, Russia’s “development” rolls on, all or nothing, and first-tier stock picking remains a fool’s pastime. Add on the premium, knock off the management fees and you should have bought the index. It is true, even post re-balancing, that the RTS lacks core components, but the modern MSCI paints a reasonably balanced view of Russian equities, and has gained 37.5% year-to-date.
Yet there was more to August than rumoured acquisitions. Even as banking fees assured positive headlines and the stock market raced for the sky, the cabinet approved its 2006 budget. Inflation issues not withstanding, the budget is hard to criticise; it spends aggressively to the appeasement of Duma officials, the Prime Minister and the electorate, but holds a realistic oil price and a healthy surplus. Inflation is going to bite, but Fradkov has long been exclusively targeting nominal GDP growth. Russia could have done far worse.
So, with the RTS showing signs of peaking and the “summer” fading, it is high time to start looking ahead, the year has already been a tumultuous one.
Yukos was no angel, but the scale of its – and Khodorkovsky’s – destruction beggared belief, regardless of their predictability. The positive bounce back was also foretold, even late coming, and by now the nation’s macro perspective is as sanguine as ever.
Equities and bonds are riding high, and have been out performing globally. The play off between the dollar and high-yield assets has been some what paradoxical: The fact that both developed and emerging markets have seen plenty of new money this summer implies that something ought to give. But oil seems determined to win its game of chicken with global confidence, so Russia’s forward growth looks well protected.
Besides, emerging asset classes have begun attracting some curious attention. Cash rich economies with questionable democratic intentions (most notably China, Venezuela and Russia) have been buying down traditionally high yield spreads, with no discernable improvement to transparency. With oil up and these politically-orientated investments performing, the trend will likely sustain itself.
The long and short of it, admittedly assuming an absence of the usual twists for which Russia is renowned, is that the market looks relatively stable through year-end and beyond.
The Russian economy is still ripe. Bankers don’t care that locals are cashing out because Westerners want in, and salary growth is set to continue supporting consumption (and inflation). Equities have redefined their peak, so upside looks limited, but the curse of Yukos seems to have been broken, another diabolical twist swept under the carpet in the quest for short-term returns.
Russia looks to be sitting pretty, but the risks are growing down the road; Putin’s obsession with control and the population’s declining sense of stability both need watching; as does the prime minister’s eagerness to drive demand side growth.
For now, though Russia’s entrenched interest groups look to have temporarily found a benign balance. It makes sense: With oil pushing $70 plus, there should be enough to go around.