Deutsche Bank’s Smith Sees 10% Micex Drop by Year-End

John-Paul Smith, the Deutsche Bank AG strategist who predicted Russia’s 1998 market crash and accurately called for a May rebound in the country’s stock market, said the Micex Index could lose 10 percent by the end of this year as sentiment erodes amid international sanctions.

“By the end of this year I’d expect the market to be significantly lower than it is now, say 10 percent,” Smith said in a phone interview yesterday. “On a strategic view I don’t think that Russia is a place that non-dedicated investors should really invest in, despite the very low valuations.”

Sanctions imposed by the U.S. and European Union to punish Russia over its role in the Ukraine conflict are driving declines in the benchmark equity gauge together with worsening investor sentiment and a retreat in oil prices, said Smith. The Micex is trading about 4 percent below its level at the start of this year, putting it on track for the worst performance since 2011 based on the London-based strategist’s forecast.

The Micex tumbled 2.3 percent to 1,440.63 yesterday to trade at 5.2 times projected 12-month earnings, compared with a multiple of 11.1 for the MSCI Emerging Markets Index. Stocks in Moscow fell the most since June 25 after the U.S. and EU imposed the most aggressive sanctions to date, including targeting specific companies such as oil producer OAO Rosneft and lender OAO Gazprombank and halting loans for public-sector projects in Russia.

Plane Crash

U.S. Treasury Undersecretary for Terrorism and Financial Intelligence David Cohen said in an interview with Bloomberg television yesterday that the U.S. is prepared to increase pressure on Russia. Cohen spoke before a Malaysian Airlines passenger jet crashed near the eastern border with Russia, killing all 295 people aboard.

Ukraine’s state security service said it intercepted phone conversations among pro-Russian militants discussing a missile strike on the plane. The separatists denied the accusation that they shot it down.

The Bloomberg Russia-US Equity index declined 4.6 percent to 87.11 in New York, and the ruble weakened 2.1 percent to 35.1682 per dollar after the crash. The Market Vectors Russia ETF, the biggest U.S. exchange-traded fund that holds Russian shares, plunged the most since November 2011, sinking 7.2 percent to $24.70.

‘Political Solution’

United Co. Rusal, a Moscow-based aluminum producer, dropped 1.6 percent to HK$3.76 in Hong Kong trading as of 12:18 p.m. local time. The MSCI Asia Pacific Index fell 0.6 percent.

Vladimir Osakovskiy, the chief economist for Russia at Bank of America Corp. in Moscow, said that while stocks will probably decline in the near future, the Malaysian plane’s downing could ultimately lead to a “political solution” to the Ukraine conflict.

“It has shown that the situation might be getting out of control,” Osakovskiy said by phone yesterday.

Russia’s $2 trillion economy avoided a recession with zero growth in the second quarter, the slowest pace since a 2009 contraction in the wake of sanctions levied after the country’s annexation of Crimea from Ukraine. The government estimates the economy will expand 0.4 percent in 2013.

Mattias Westman, the chief executive officer of London-based Prosperity Capital Management Ltd., which manages about $3.6 billion in Russian assets, said he expects the Micex to gain this year.

Ukraine Impact

“I don’t expect any significant sanctions, and the economy is likely to accelerate in the second half of the year,” Westman said by phone yesterday. “People are concerned over the Ukraine crisis, but in the end things will calm down and it will be business as usual again. Many Russian companies trade at low valuations and yet have a good growth rate, including all food retailers and companies like OAO Gazprom and OAO Bashneft.”

Deutsche Bank’s Smith, who won recognition for warning of a possible Russian currency devaluation in early 1998 before the country devalued the ruble and defaulted on $40 billion of debt, said the Ukraine conflict “has a big role in the short-term movements” in Russia’s market and “we might see some of the longer-term pension money there coming out in the next year and a half.”

As for the impact of the Malaysian air crash, “I’d rather not think about the implications for financial markets, since the human element is more important at this time,” Smith said. “It’s also too early to draw any firm conclusions.”

Russia’s benchmark stock gauge is still up 16 percent from this year’s low in March, after President Vladimir Putin annexed Crimea. While the measure has fallen 4.2 percent since the beginning of the year, it has rallied 9.3 percent since Smith on May 6 said investors were overreacting to the Ukraine crisis.

“The only real case for investing in Russia is when it gets dramatically oversold, and clearly that’s not the case at the minute,” Smith said.

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