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Discount of 50% to Emerging Markets Lures HSBC: Russia Overnight

Discount of 50% to Emerging Markets Lures HSBC
An employee pours molten aluminum at United Company Rusal's Bogoslovsky aluminum smelter, Russia. Source: Rusal via Bloomberg

Russian stocks will extend their best start to a year since 2006 as valuations almost 50 percent below emerging markets and political reform lure investors, according to HSBC Global Asset Management. RTS futures climbed.

OAO Surgutneftegas, Russia’s fourth largest oil producer, surged to the highest level since May 2008 in New York and fellow energy companies OAO Lukoil and OAO Gazprom, as well as OAO GMK Norilsk Nickel, the world’s largest producer of the metal, also jumped. Futures expiring in March on the dollar-denominated RTS index rose 0.9 percent to 165,045 in U.S. trading. Urals crude, Russia’s chief export blend, reached a nine-month high of $118.01 per barrel.

Russia’s 30-stock Micex index has advanced 11 percent in 2012, and trades at 5.7 times analysts’ earnings estimates for member companies, compared with 10.4 for the MSCI Emerging Markets Index of developing-nation stocks. Prime Minister Vladimir Putin, running for president amid protests against December elections that saw his United Russia party returned with a reduced majority, has promised to reverse “repressive” state policies and protect private business in his campaigning.

“There’s a lot of potential in Russia both on valuations and a gradually progressing reform agenda, you can make money, very good money, from having things go from being ‘not great’ to ‘not too bad,” Ed Conroy, who helps oversee $1.2 billion of Russian assets as a fund manager at HSBC Global, said by phone from London yesterday. “Russia trades at a 50 percent discount to emerging markets, making this a reasonably good entry point for investors with a two- to three-year view.”

UBS Upgrade

UBS AG raised its recommendation on Russia stocks to “overweight” as the market benefits from a decline in equity risk premium and the shares trade at a discount to global markets, Nicholas Smithie, an analyst, wrote in a report dated today. The report didn’t give the previous recommendation.

United Co. Rusal, the world’s largest aluminum producer, jumped 6.9 percent to HK$6.85 in Hong Kong trading as of 11:14 a.m. local time. The MSCI Asia Pacific Index gained 0.6 percent.

Surgutneftegas’ American depositary receipts gained 2.3 percent to $6.32 after its shares in Moscow advanced 1 percent to 19.075 rubles, the equivalent of 64 U.S. cents. One ADR equals 10 ordinary shares. The Bloomberg Russia-US 14 Index of Russian companies traded in New York gained for the fifth time in six days, adding 0.8 percent to $108.67, a five-month high.

OAO Sberbank, Russia’s largest lender, rose to the highest level in six months in New York after reporting profit increased 9.4 percent in January from a year earlier. Sberbank is Alfa Bank’s “top sector pick” among Russian banks, Moscow-based analysts Jason Hurwitz and Eldar Vaganov said in a report yesterday.

Commodity Prices

Sberbank’s ADRs rose 1.9 percent to $12.75, the highest since Aug. 9. The shares fell 0.4 percent on the Micex in Moscow yesterday to 93.48 rubles, or $3.13. One ADR equals four ordinary shares.

The Standard & Poor’s GSCI index of 24 raw materials gained 0.7 percent to 672.96 as copper futures rebounded and nickel rose for a third day.

Mechel, Russia’s largest producer of steelmaking coal and the worst-performing stock on the Bloomberg Russia-US 14 Index last year, fell 2.7 percent to $11.74.

The Market Vectors Russia ETF, a U.S.-traded fund that holds Russian shares, advanced 1 percent to $31.99. The RTS Volatility Index, which measures expected swings in the index futures, rose for the second day in three, adding 3.9 percent to 33.47 points.

Jobless Rate

Crude traded in New York rose the most in three weeks yesterday as the dollar fell against the euro after Federal Reserve Chairman Ben S. Bernanke said that the U.S. unemployment rate understates weakness in the nation’s labor market. Oil for March delivery added 0.4 percent in electronic trading today on the New York Mercantile Exchange.

Brent crude for March settlement increased 0.3 percent to end the day at $116.23 on the London-based ICE Futures Europe exchange. Urals added 1.5 percent to $118.01, the highest level since May 2011.

Lukoil, Russia’s second-largest oil producer, gained 1.7 percent in U.S. trading to $60.94 yesterday, the highest level since August. Moscow-traded shares of the company fell 0.9 percent to 1,793.70, or $60.14.

Gazprom, the world’s biggest gas producer, rose 0.6 percent to $12.72 in New York, the highest level in six months. The company’s Moscow-listed shares fell 0.9 percent to 188.11 rubles, or $6.31. One ADR represents two ordinary shares.

Nickel Taxes

OAO GMK Norilsk Nickel, which is also the world’s largest producer of palladium, gained 1.1 percent to $20.02 in the U.S. yesterday. Norilsk’s stock in Moscow rose 0.3 percent to 5,887 rubles, or $197.38 yesterday. Ten ADRs equal one ordinary share.

Russia will cut its nickel export duty to $1,245.50 a metric ton from March 5 after a price decline, the government said. That’s a decrease of 41 percent from $2,117.80 a ton now, Interfax reported.

The RTS Index advanced for a sixth consecutive day, adding 0.4 percent to 1,632.35, while the 30-stock Micex slipped 0.9 percent to 1,549.49.

Brazil’s Bovespa index, which has gained 16 percent this year, trades at 10.5 times estimated earnings, according to data compiled by Bloomberg. The Shanghai Composite Index trades at 9.4 times and the BSE India Sensitive Index has a ratio of 15.6.

Russia’s Finance Ministry plans to offer 35 billion rubles of domestic ruble-denominated bonds known as OFZs due 2021 to yield between 7.75 percent and 7.8 percent, according to a statement on its website yesterday.

The country’s Federal Statistics Service is also due to publish weekly inflation data.

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