Russian Stocks ‘Hostage’ to Global Recovery Concern

(Corrects RTS high in seventh paragraph.)

Russia’s stock market is facing a correction as investors take a “defensive stance” on riskier assets amid concern the global recovery will slow, Renaissance Capital said in report today.

The dollar-denominated RTS Index (RTSI$) is “unlikely” to meet RenCap’s 1,900 forecast by the end of the year as long as Russia is “held hostage” to doubts over a global recovery, strategists Tom Mundy and Roland Nash wrote in an e-mailed report today. The RTS was down 0.2 percent at 1,644.96 as of 3:13 p.m. in Moscow for its first drop in three days.

“Russia’s equity market is again caught between the tailwind of impressive domestic drivers and the headwind of external concerns,” they wrote. Russian stocks “have started to lose momentum” after a “stellar 2009.”

Rising oil prices are helping the world’s biggest energy exporter recover from its worst financial crisis since the 1998 default, pushing the RTS up 129 percent last year after a 72 percent decline in 2008, according to Bloomberg data.

The country’s “long-term story” is “sound,” said RenCap, which came joint first with UniCredit SpA in Institutional Investor’s poll for Emerging Europe, Middle East and Africa research last year. Improved economic data became “more entrenched” in the first three months while the cost of borrowing is set to fall, bolstering the recovery, the report said.

“It is just a matter of time before improved borrowing conditions combine with further evidence of a pick-up in the domestic economy to lend weight to the equity market,” they wrote.

The RTS will match its May 2008 high of 2,487 by the middle of next year, as earnings growth is poised to improve, UralSib Financial Corp. said today. UralSib’s year-end estimate for the RTS is 1,950.

“Russian equities are more cheaply rated than their peers in other major emerging markets,” Chris Weafer, chief strategist at UralSib, wrote in a report. “Earnings growth is expected to pick up strongly through the second half of this year and into 2011.”

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