by William Mauldin
Russian stocks' six-year advance to a record may end after oil prices slumped to the lowest level in almost two years, weighing on economic growth and sending investors to developing countries that import crude.
The benchmark Russian Trading System Index, which gets half its value from energy stocks, has fallen 3.4 percent this year from the record set on the last trading day of 2006. OAO Lukoil, the country's biggest oil producer, and OAO Surgutneftegaz, its fourth-largest, have led the drop.
``We sold in the last few weeks,'' said Guenter Faschang, who manages almost $1 billion at Vontobel Asset Management in Vienna. ``The whole economy in Russia heavily depends on the export of raw materials.'' He has 9 percent of his assets in Russian stocks, down from 25 percent six months ago.
While oil has been falling since prices set records in July, the slide accelerated in the past month, shaking investor confidence. Oil and gas account for about two thirds of Russia's exports, prompting some investors to lower their expectations for the country's growth.
This year's decline in the Russian benchmark is the seventh-biggest among 82 indexes tracked by Bloomberg. Morgan Stanley Capital International's Emerging Markets Index, which gets 16 percent of its value from energy stocks, has fallen 0.8 percent.
The RTS had risen each of the past six years, climbing an average of 54 percent annually and trouncing the MSCI gauge's 18 percent annual average gain.
Oil's Effect
Oil futures traded in New York have slid 30 percent to $55.04 a barrel since reaching a record $78.40 on July 14. Partly for that reason, expansion in gross domestic product will slow to 6 percent this year and 5.5 percent in 2008 from 6.8 percent last year, according to forecasts in November from the Organization for Economic Cooperation and Development.
Crude yesterday rebounded 4.7 percent in New York, the most since hurricanes devastated the Gulf of Mexico coast in September 2005, after the U.S. said it will double the size of the nation's Strategic Petroleum Reserve.
Russian economic growth this year would be 7 percent with oil at $50 a barrel, versus 8 percent at $70, according to a report last week by UBS AG economists in Moscow.
Emerging Markets
Investors in emerging markets are retreating from Russia. They pulled $36.8 million out of Russia-focused mutual funds this year, according to Emerging Portfolio Fund Research, a Boston firm. At the same time, they put $846 million in greater China funds and $1.4 billion in global emerging market funds.
Money managers have room to follow suit. A survey this month by Merrill Lynch & Co. showed 72 percent of emerging- market money managers still held a higher percentage of Russian stocks than the country's weighting in the MSCI benchmark.
Political turmoil in the runup to elections next year to replace President Vladimir Putin also may cause investors to cut back on Russian stocks. Bear, Stearns & Co. strategists this month recommended that money managers reduce their Russian shareholdings because of the approaching national election.
While Russia is the world's biggest energy exporter, China and India benefit from falling oil prices because they import crude.
`Very Different'
``Russia is very different from other emerging markets because it is an oil-based economy,'' said Daniel Broby, who helps manage $14 billion as chief investment officer of Bankinvest in Copenhagen. Broby says he owns Lukoil shares and will keep them for now.
Michael Keppler, who manages more than $1 billion in emerging markets at Keppler Asset Management in New York, recently sold all of his Russia holdings on the view that the market won't outperform others as it did in 2006. The RTS soared 71 percent last year, the 10th-best performance among 82 indexes tracked by Bloomberg.
``We should expect something of around 8 percent, just like the MSCI emerging markets benchmark,'' said Keppler. The MSCI index rose 29 percent in 2006.
The rally in Russian stocks since 2000 has made the shares more expensive. Companies in the RTS index sell in aggregate for 8.6 times earnings for the past year, above their average price- earnings ratio of 7 over the past five years.
`Unrealistic'
``It's unrealistic to expect the same level of performance in 2007, because stocks are no longer as cheap,'' said Chris Weafer, chief strategist at Alfa-Bank in Moscow.
Oil isn't the only falling commodity that's weighing on Russian stocks. Metals prices also are dropping, with copper down 36 percent from its 2006 peak. The benchmark index gets 12 percent of its value from metals companies such as OAO GMK Norilsk Nickel. Copper accounts for a fifth of Norilsk's sales.
Without rising commodity prices, energy and mining companies will find it difficult to keep their earnings growing quickly enough to justify further stock-market jumps.
Optimists point out that the worst of the decline in oil and metals prices may be over because economies around the world are expanding, leading to increased demand for commodities.
``I would be surprised to see commodity prices fall apart in a world where global growth still seems healthy and supply problems could still arise,'' said Andrew Howell, an emerging markets strategist at Citigroup Inc. in New York.
Investors concerned about the fall in oil also can shift into Russian consumer stocks, banks, electricity generators and telecommunications companies.
Consumers' income in Russia is growing at about 10 percent a year after inflation. The government can keep spending when oil prices are low because it has an oil stabilization fund and the third-largest foreign reserves in the world, said Howell.
``You can lighten up on commodity exporters and do domestic demand plays in Russia,'' said Ian Hague, who manages more than $1 billion at Firebird Management LLC in New York. Banks, real estate companies and Russian retail and consumer stocks look attractive, he said.
Still, his firm has cut its Russian holdings in the past year while adding shares in countries such as Kazakhstan and Romania.
BLOOMBERG
Russian stocks' six-year advance to a record may end after oil prices slumped to the lowest level in almost two years, weighing on economic growth and sending investors to developing countries that import crude.
The benchmark Russian Trading System Index, which gets half its value from energy stocks, has fallen 3.4 percent this year from the record set on the last trading day of 2006. OAO Lukoil, the country's biggest oil producer, and OAO Surgutneftegaz, its fourth-largest, have led the drop.
``We sold in the last few weeks,'' said Guenter Faschang, who manages almost $1 billion at Vontobel Asset Management in Vienna. ``The whole economy in Russia heavily depends on the export of raw materials.'' He has 9 percent of his assets in Russian stocks, down from 25 percent six months ago.
While oil has been falling since prices set records in July, the slide accelerated in the past month, shaking investor confidence. Oil and gas account for about two thirds of Russia's exports, prompting some investors to lower their expectations for the country's growth.
This year's decline in the Russian benchmark is the seventh-biggest among 82 indexes tracked by Bloomberg. Morgan Stanley Capital International's Emerging Markets Index, which gets 16 percent of its value from energy stocks, has fallen 0.8 percent.
The RTS had risen each of the past six years, climbing an average of 54 percent annually and trouncing the MSCI gauge's 18 percent annual average gain.
Oil's Effect
Oil futures traded in New York have slid 30 percent to $55.04 a barrel since reaching a record $78.40 on July 14. Partly for that reason, expansion in gross domestic product will slow to 6 percent this year and 5.5 percent in 2008 from 6.8 percent last year, according to forecasts in November from the Organization for Economic Cooperation and Development.
Crude yesterday rebounded 4.7 percent in New York, the most since hurricanes devastated the Gulf of Mexico coast in September 2005, after the U.S. said it will double the size of the nation's Strategic Petroleum Reserve.
Russian economic growth this year would be 7 percent with oil at $50 a barrel, versus 8 percent at $70, according to a report last week by UBS AG economists in Moscow.
Emerging Markets
Investors in emerging markets are retreating from Russia. They pulled $36.8 million out of Russia-focused mutual funds this year, according to Emerging Portfolio Fund Research, a Boston firm. At the same time, they put $846 million in greater China funds and $1.4 billion in global emerging market funds.
Money managers have room to follow suit. A survey this month by Merrill Lynch & Co. showed 72 percent of emerging- market money managers still held a higher percentage of Russian stocks than the country's weighting in the MSCI benchmark.
Political turmoil in the runup to elections next year to replace President Vladimir Putin also may cause investors to cut back on Russian stocks. Bear, Stearns & Co. strategists this month recommended that money managers reduce their Russian shareholdings because of the approaching national election.
While Russia is the world's biggest energy exporter, China and India benefit from falling oil prices because they import crude.
`Very Different'
``Russia is very different from other emerging markets because it is an oil-based economy,'' said Daniel Broby, who helps manage $14 billion as chief investment officer of Bankinvest in Copenhagen. Broby says he owns Lukoil shares and will keep them for now.
Michael Keppler, who manages more than $1 billion in emerging markets at Keppler Asset Management in New York, recently sold all of his Russia holdings on the view that the market won't outperform others as it did in 2006. The RTS soared 71 percent last year, the 10th-best performance among 82 indexes tracked by Bloomberg.
``We should expect something of around 8 percent, just like the MSCI emerging markets benchmark,'' said Keppler. The MSCI index rose 29 percent in 2006.
The rally in Russian stocks since 2000 has made the shares more expensive. Companies in the RTS index sell in aggregate for 8.6 times earnings for the past year, above their average price- earnings ratio of 7 over the past five years.
`Unrealistic'
``It's unrealistic to expect the same level of performance in 2007, because stocks are no longer as cheap,'' said Chris Weafer, chief strategist at Alfa-Bank in Moscow.
Oil isn't the only falling commodity that's weighing on Russian stocks. Metals prices also are dropping, with copper down 36 percent from its 2006 peak. The benchmark index gets 12 percent of its value from metals companies such as OAO GMK Norilsk Nickel. Copper accounts for a fifth of Norilsk's sales.
Without rising commodity prices, energy and mining companies will find it difficult to keep their earnings growing quickly enough to justify further stock-market jumps.
Optimists point out that the worst of the decline in oil and metals prices may be over because economies around the world are expanding, leading to increased demand for commodities.
``I would be surprised to see commodity prices fall apart in a world where global growth still seems healthy and supply problems could still arise,'' said Andrew Howell, an emerging markets strategist at Citigroup Inc. in New York.
Investors concerned about the fall in oil also can shift into Russian consumer stocks, banks, electricity generators and telecommunications companies.
Consumers' income in Russia is growing at about 10 percent a year after inflation. The government can keep spending when oil prices are low because it has an oil stabilization fund and the third-largest foreign reserves in the world, said Howell.
``You can lighten up on commodity exporters and do domestic demand plays in Russia,'' said Ian Hague, who manages more than $1 billion at Firebird Management LLC in New York. Banks, real estate companies and Russian retail and consumer stocks look attractive, he said.
Still, his firm has cut its Russian holdings in the past year while adding shares in countries such as Kazakhstan and Romania.
BLOOMBERG
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