Fear of the Quarterly Report
// Analysts expect Russian stock market to fall as U.S. companies issue their reports
The more American companies release their third-quarter financial results and plans for the fourth, the worse world stock markets, such as Russian ones, feel, say Russian analysts this week. Next week may see a short period of speculative activity, though, before the October 30-31 session of the U.S. Federal Reserve Board. That will be a risky game.
Lemons
None of the experts questioned by Kommersant expected the Russian stock market to rise next week. Perhaps the most optimistic was IK Antanta Capital's Alexander Potavin, head of the analytical department for retail clients, but he spoke mainly about risk factors and market weakness than about fundamental reasons for growth. “European stock markets experienced a sharp fall at the beginning of this week because of correction on the U.S. stock market,” Potavin said. “Stock markets have entered a high-volatility zone. Heavy fluctuations in the American currency add nervousness to the market, as do the growth and then steep decline in oil prices and jumps in long-term American government bonds. In that connection, events may develop one of two ways. Either the stock market will continue to slow the world economy and lower fuel prices, and that will clear the way for the further fall of Russian stock indicators. Or else the market will get its share of the cold shower and will wait for the results of the next session of the Federal Reserve Board session on open markets on October 31.
“In either case, last week ended with Western stock markets falling, which put something of a chill in the overbuying there. Therefore, in our view, there is no need to expect further sharp falling in stock markets, since they will now be waiting for the Federal Reserve Board to lower interest rates. In the next week, we may see growth in market indexes, but their volatility will grow as well. The market is being carried by the weak and nervous.”
It is possible that the analyst's relative optimism is connected with the particular importance he places on the economic data that will be issued next week. “The coming week will be thin in macroeconomic statistics. The market will be carefully following data on the sales of existing homes in the United States on October 24, new house sales on October 25 and the Merrill Lynch financial statement on October 24,” Potavin said.
Hs colleagues are inclined to pay more attention to the financial results of local companies across the ocean. “In the next week, we will probably see a small – 2-3 percent – drop in the Russian stock market,” said chief analyst at GK Region Konstantin Gulyaev. “External factors will be the cause: the publication of a large number of corporate reports in the U.S., and for companies on leading indexes – the Dow Jones and S&P. The Merrill Lynch report will be especially interesting and that of the largest U.S. mortgage company Country White Finance, which suffered a lot in the mortgage crisis. All of those accounts, together with fourth-quarter prognoses, if the prognoses are pessimistic, may provoke a serious downturn in the market. Last week, Dow Jones lost 5 percent due to investor disappointment in the corporate reports, and that tendency may well continue. I personally expect high volatility in trading on the market and a further fall.”
Gulyaev expects both corporate and macroeconomic data from the U.S. to bear ill tidings to investors. That is, of course, unless the data are too bad. “The publication of data on real estate sales, where a downturn is expected as well, may negatively affect the market,” he noted. “But it may be positive as well. If the statistics are really bad, a speculative game may begin this week in hopes the Federal Reserve Board will lower interest rates. Of course, that game is very risky. Inflationary pressure has begun to increase and, with the weak dollar and growth of liquidity, the risk of inflation is high in any case. Therefore, the Fed may not lower interest rates, which would be a cold shower for the market.”
Denis Filippov, head of the brokerage operations department at Renaissance Online expressed a very similar point of view. “In the next week, I expect growth of volatility on the Russian stock market. The main vector is set by the American market, and the mood is pessimistic there in connection with signals being received that the mortgage crisis has touched other sectors of the economy, housing construction and finance in particular. If poor corporate reports and bad macroeconomic data continue to be issued in the U.S., the Russian market will continue to fall. I will also note that the risk of the U.S. economy slowing down has already begun to influence conditions on the oil market. In addition, oil prices after the recent boom require correction from the technical point of view, even in spite of the support the conflict between Turkey and Iraq s giving the market. So there are simply no growth factors on the Russian market. The improvement in liquidity is supporting it, of course, as is the influx of Western capital, but still, I think, a 3-5-percent fall is possible next week. Of course, speculation on the lowering of the interest rate is possible closer to the Federal Reserve Board session on October 31.”
More corroboration comes from Anatoly Kaplin, head of the fund management department at UK Interfin Capital, who said that “From the technical point of view, the RTS index may fall to the area of 2050-2100 in the second half of this week. The American market is the main source of negative influence on emerging markets, since it has begun to correct itself against the background of weak construction and financial sectors. And oil prices have a double influence in Russia. On one hand, the high cost of hydrocarbons signals the long-term saturation of domestic liquidity in Russia and macroeconomic stability. On the other hand, because of the negative effect of high oil prices on the world economy and the synchronous movement of various markets, Russian stocks fall in the worldwide wake.”
Juice
Still, Russian investors need not despair. That is, first of all, because experts do not expect a particularly serious downturn in the domestic market. According to Gulyaev, “The Russian market is now more stable than the world market, which explains the growth of demand by foreigners. In the last week, we observed an influx of foreign investors onto the domestic market, which is largely connected with stabilization of the political situation in the country. In addition, the Russian market is lagging behind other emerging markets, therefore, its reaction to external disturbances is not as strong.”
Second, Russian companies, unlike American, have been pleasing investors recently with good financial showings. In that connection, Filippov notes, it will be interesting the third-quarter report for the American ConocoPhillips, due out today. Since it owns a 20-percent share package in LUKOIL, some of the Russian company's indicators will be integrated into the data of that report, which will permit the financial results for LUKOIL in the third quarter to be divined.
Moreover, one more extremely important event for the Russian market will take place this week. An extraordinary shareholders meeting will be held by RAO UES of Russia at which approval for the final stage of reforms will be considered.
Kaplin said, “No one doubts that the shareholders will approve the plan to split the holding up. The main intrigue is how many votes will be cast for reorganization. The volume of stock redeemed on offer will depend on that. The shareholders that do not take part in the voting or who vote against reform will have the right to sell their share of stock significantly over the current market level. The more of them there are, the smaller the portion of their stock that they can sell to RAO – the maximum quantity of stock that the corporation can redeem is restricted by cost to 10 percent of the cost of its assets.”
Gulyaev said, “The RAO meeting is the cornerstone of the second stage of the reform of the Russian power system. There is a risk, of course, that the shareholders will not approve the reform, but it is extremely small. Thus RAO stock will most likely rise, since the price of the offer will be 10-15 percent above market price. It is also important how many shares are put on offer, since it will be understood from that how much money RAO will spend to buy up its own shares. That will influence the company's financial indicators.”
Filippov thinks that the RAO shareholders meeting will be to the advantage of energy stocks as a whole, since it will draw attention to that sector. In addition, he noted, the company itself can support its stock by reducing the number of shares put on offer.
Opportunities on the market for ruble-denominated securities are also tied to offers. With the uncertain market conditions, the main tendency on that market is to refinance through offers. That allows issuers to avoid turning to banks and other sources of liquidity. Issues are completely bought up and redistributed on the spot among investors who owned them before.
That method of refinancing is profitable for investors as well. Since an issue is being bought up, investors see that the issuer has funds and they will not worry about a default prematurely. On the other hand, investors receive an old issue with a higher income.
That method of refinancing comes with risks as well. Far from all issuers can buy up a whole issue straight away without applying to the external market for liquidity. And investors' appetite for piecemeal income has substantially risen lately. That may result in partial offers of issues by agreement with investors, when half of an issue is refinanced, for example, and the other half is refinanced in two or three months.
Vladimir Malinovsky, head of the securities market analysis department at IB KIT Finance, said, “Banks have reduced the volume of their corporate crediting, limiting companies' possibilities for refinancing loans. But investors prefer issues to repayment by offer. Demand for new placements is still on a low level, while interest rates are often exorbitant for issuers.”
At present, the volume of issues placed on offer is about 4-5 billion rubles a week and 50-60 percent of that volume is refinanced.
Petr Rushailo, Pavel Chuvilyaev
All the Article in Russian as of Oct. 24, 2007
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