Cheapest Stocks Since 2009 Shunned: Russia Overnight

JPMorgan Chase & Co. and Morgan Stanley are abandoning their bullish recommendations on Russian stocks, concerned that falling oil and investors shunning riskier assets will overshadow the lowest valuations since 2009.

JPMorgan, the largest U.S. bank by assets, advised cutting holdings to levels that match benchmark indexes in a report yesterday that followed a similar downgrade four days earlier by New York-based Morgan Stanley. The MSCI Russia Index sank to 5.1 times reported earnings yesterday, a 64 percent discount versus the MSCI All-Country World Index, the widest gap since February 2009, according to data compiled by Bloomberg.

The Bloomberg Russia-US Equity Index, which tracks the most-traded Russian shares in New York, has tumbled 6.6 percent in the past month on concern that China’s economic slowdown and Europe’s debt crisis will curb demand for Russian commodities. Urals crude, the nation’s chief oil blend, has dropped 8.3 percent from a March 1 high, paring this year’s gain to 8.7 percent. The index was little changed yesterday as OAO Gazprom’s American depositary receipts sank 1.5 percent.

“If this emerging-market correction continues, we can’t envisage Russia outperforming,” wrote David Aserkoff, a London-based strategist at JPMorgan. “If we were not so positive on the medium-term re-rating potential in Russia, the high-beta, high-volatility nature of the Russian market would dictate an underweight.”

Russia ETF Gains

The Bloomberg Russia-US equity gauge ended yesterday at 103.23, after slipped 1.3 percent on April 16. Futures expiring in June on Moscow’s dollar-denominated RTS Index added 0.8 percent to 155,360 in U.S. trading.

The Market Vectors Russia ETF, a U.S.-traded fund that holds Russian shares, climbed 0.8 percent to $29.89 yesterday. The RTS Volatility Index, which measures expected swings in the index futures, slipped 2 percent to 31.22 points in New York.

The MSCI Russia gauge of equities listed in Moscow, London and New York has lost about six percentage points more than the MSCI All-Country World index during the past month. Stocks around the world have retreated since the middle of March as China posted the slowest economic growth in almost three years and investors speculated that Spain may become the fourth euro-area nation to need a bailout.

The 5.1 price-earnings ratio on the MSCI Russia index is 44 percent below its 9.1 average over the past decade, according to data compiled by Bloomberg. The gauge has the lowest multiple among benchmark indexes in 21 emerging countries tracked by MSCI and Bloomberg, the data show.

‘Trough Valuations’

While Russian stocks are trading at “near trough valuations,” the country’s share prices tend to swing more than regional peers, exposing investors to potential losses should global equities keep falling during the second quarter, according to JPMorgan’s Aserkoff.

The MSCI Russia index’s 30-day volatility, a measure of historical price swings, was 25 yesterday, according to data compiled by Bloomberg. That’s almost double the reading of 13 for the MSCI Emerging Markets Index.

OAO Mechel, Russia’s biggest producer of steelmaking coal, fell 2.3 percent to $8.93 in New York yesterday. The retreat swelled the ADRs’ discount to the company’s Micex-listed shares to 1.3 percent.

Mechel has six months to fix violations by its eastern Siberian unit after the country’s environmental regulator said the breaches were significant enough to warrant canceling some licenses.

Russia’s Subsoil Resources Agency may pull three licenses from Mechel’s Yakutugol unit, the Kommersant newspaper reported yesterday, citing an unidentified person at the country’s environmental watchdog, Rosprirodnadzor.

Energy Demand

Mechel stock in Moscow fell 4.1 percent to 266.80 rubles, or $9.05, the biggest one-day drop since April 4. One ADR is equal to one ordinary share.

Urals crude has retreated from a 3 1/2-year peak reached on March 1 amid concern that global demand for energy will weaken. Contracts for Brent crude traded in London have declined 5.1 percent from a March 13 closing high, to $118.78 a barrel yesterday.

Brent crude prices will probably retreat further this year to an average $105 a barrel, according to Morgan Stanley’s forecasts. Lower oil will expose Russian shares to “profit taking,” wrote Marianna Kozintseva, the London-based strategist at Morgan Stanley who cut her rating on Russia to equalweight from overweight on April 13.

Kozintseva said a “transition paralysis” in the Russian government after Prime Minister Vladimir Putin’s victory in presidential elections on March 4 may also weigh on Russian stocks. Putin, who has said he plans to swap jobs with outgoing President Dmitry Medvedev, will take office on May 7.

‘Tactical Calls’

Russia “remains our preferred market in the long term,” she said. “However, recent shortening of the investment cycles and rising market volatility point to increasing importance of the tactical calls.”

Crude oil for May delivery, Russia’s biggest export earner, climbed 1.2 percent to a two-week high of $104.20 a barrel on the New York Mercantile Exchange yesterday, while Brent oil for June settlement was little changed at $118.78 on the ICE Futures Europe exchange. Urals crude, Russia’s chief export blend, was also steady, at $114.84.

ADRs of oil producer OAO Surgutneftegas slid 1.6 percent to $6.59 in New York, to trade at a 0.3 percent premium to the company’s preferred shares in Moscow. Surgut’s Micex-listed stock slipped 2.5 percent to 19.39 rubles, or 66 U.S. cents yesterday. One ADR is equal to 10 ordinary shares.

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