Russian equities will maintain the lowest valuations among emerging-market stocks next quarter as the nation delays state asset sales, according to Alfa Capital Partners Ltd., JPMorgan Chase & Co. and Libra Capital.
Moscow’s Micex Index has slumped 9.6 percent this quarter, while the Bloomberg Russia-US Equity Index (RUS14BN) of the most-traded Russian companies in the U.S. tumbled 20 percent. The decline sent Micex member valuations to five times estimated earnings, about half the average multiple for companies trading on the MSCI Emerging Markets Index. (INDEXCF) Russia-dedicated equity funds posted outflows for nine consecutive weeks through June 20, pulling out $535 million for the period, according to EPFR Global.
Russia, which received 50 percent of its budget revenue from oil and gas last year, plans to reduce its reliance on energy sales with President Vladimir Putin pledging last week to fulfill the government’s state assets sale plans starting this year. Prospects for the government sale of a stake in power distributor OAO MRSK Holding (MRSK) faded after the company said on May 11 that it would merge with Federal Grid Co., the high-voltage transmission monopoly.
“The officials’ comments on privatization remain ambiguous, ” Igor Lavrentiev, who oversees over $1 billion in Russian assets at Libra Capital in Moscow, said by e-mail on June 26. “Everyone feels that there is a sort of ‘competition’ between the state-owned companies to delay the placements as the market conditions are unfavorable. It is a vicious circle as the budget needs the proceeds the most when the market conditions are the worst.”
The Bloomberg Russia-U.S. Equity Index fell for the first time in three days, declining 1.6 percent to 85.34. RTS stock- index futures climbed 0.9 percent to 128,260.
Russia approved a plan on June 7 to loosen its grip on the economy this year by reducing state shares in OAO Sberbank (SBRCY), the country’s largest lender, tanker operator OAO Sovcomflot and fertilizer maker OAO Apatit. The plan targets revenue of 300 billion rubles ($9.3 billion) this year, with about half of that total coming from those three companies, Economy Minister Andrei Belousov said at the June 7 meeting.
In April the government postponed a roadshow of the Sberbank stock offering as the bank’s shares dropped below a level at which officials were willing to sell. Igor Shuvalov, Putin’s first deputy, said on April 16 that the Sberbank sale may be delayed until 2013 or 2014.
“The government sends ambiguous signals on privatization, showing commitment in principle on the one hand but reluctance to cede control of the most valuable assets on the other,” Alex Kantarovich, head of research at JPMorgan in Moscow, said by e- mail on June 25. “The external conditions are unsupportive as valuations remain depressed.”
Russian equities trade at the cheapest valuations among 21 emerging markets tracked by Bloomberg, reflecting concern that the country, which relies on energy sales for half of government revenue, is too reliant on oil.
“The ideas of reforms and state asset privatization are very good but investors have heard many such promises and feel disappointed by the past efforts,” Victor Bark, head of asset management at Alfa Capital, said by e-mail on June 25. “In order for these government decisions to support the market, we need to see transparent implementation mechanisms and to know who will get which stakes in state-owned companies.”
Russia plans to maintain its controlling stakes in OAO Transneft, Russia’s oil-pipeline operator, and in Federal Grid Co., the high-voltage transmission monopoly, by reducing its ownership to 75 percent plus one share by 2016, Belousov said on June 7.
The RTS Index (RTSI$) in Moscow gained 2.8 percent to 1,316.46, while the 30-stock Micex climbed 2.1 percent to 1,371.00 by 10:31 a.m. in Moscow.
OAO RusHydro (RSHYY), Russia’s largest renewable energy producer, dropped 5.1 percent to $2.23. Shares traded in Moscow gained 2.3 percent to 77.85 kopeks, the equivalent of 2.4 cents. One ADR is equal to 100 ordinary shares.
OAO Mechel (MTLR), Russia’s largest coal producer for steelmakers, pared losses of as much as 5.2 percent to close unchanged at $5.93 in New York, as Goldman Sachs Group Inc. (GS) cut its rating on June 27 to neutral from buy. Mechel shares in Moscow added 3 percent to 194.30 rubles, or the equivalent of $5.92. One ADR represents one ordinary share.
“Overall the privatization plan is less important for the market than the efforts to improve the investment climate, which so far have been negligible,” Libra’s Lavrentiev said. “I do not expect any progress on that in the next quarter.”
Brent oil, which underpins Russia’s Urals crude blend, climbed 1.9 percent to $93.05 a barrel on the London-based ICE Futures Europe exchange. Oil traded in New York added 2.6 percent to $79.70.
OAO Gazprom (OGZPY), the world’s biggest natural gas exporter, fell 3.1 percent to $9.01 as Russia’s Finance Ministry said yesterday it will revisit its natural-gas extraction tax proposals in August. The proposal to quadruple the extraction tax, announced in May, prompted the head of OAO Novatek, the largest non-state producer, to demand a revision of the “shocking” plans, saying the change would curtail investment.
The Market Vectors Russia ETF (RSX), a U.S.-traded fund that holds Russian shares, lost 1.4 percent to $24.80. The RTS Volatility Index, which measures expected swings in the index futures, fell 2.9 percent to 36.86 points.
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