Russia and the CIS in 2013

December 20, 2012


If no one ever took risks, Michelangelo
would have painted the Sistine floor.
Neil Simon, playwright

Government intent on maintaining domestic stability in 2013. Stock selection rather than market timing will again be the winning strategy for investors in Russia in 2013, especially in 1H13. We again expect Russia to deliver relatively stable economic growth (we forecast 3.5% GDP growth for 2013 versus 3.8% this year), but the main driver of sentiment, and therefore indexes, will continue to be external events.

Concentrate on stocks and not indexes. We no longer issue a forecast target for the indexes but instead concentrate on stock selection, i.e. those stocks that can deliver steady earnings growth to justify a re-rating over the coming year. While the indexes are slightly down YTD, over 20 DRs have gained by greater than 20% and 14 have fallen by more than 10%.

RTS Guidance. Although we do not issue a formal Index target, if the forward P/E rating of the market were to return to a normalized level relative to the PE of MSCI GEM then the implied level for the RTS would be 2,150.

We prefer domestic themes over extractive industries. Our strong preference, as in 2012, is for domestic-oriented themes, such as retail, TMT, real estate, transport and banks. We also highlight some stocks in the extractive industries, such as NOVATEK, Eurasia Drilling Company and TMK, which are well placed to show long-term earnings growth. Gold and gold producers may be a strong theme in 2013 as investors become more concerned about the impact of an extended QE program on the dollar. High-beta names such as Mechel and Evraz will continue to present short-term opportunities. Some of the stocks cited in the list of top picks have low daily turnover, and, while investors will remain wary of these in the expected risk-on, risk-off environment of 1H13, we recommend building positions in these stocks during this period to benefit from the expected strong market appreciation in 2H13.

Literary theme. In this review of investment market prospects for 2013 and the evolution of the longer_term investment case, we have used as a theme analogies to be learned from some of Russia’s classic novels. The most appropriate works from nine authors are considered.

Equity issuance of $13 bln in 2012 may climb to $20 bln in 2013. The total value of equity issuance in 2012 is on course to reach almost $13 bln. For 2013, the expected target is between $15 bln and $20 bln, with the state likely to raise about $5 bln of that total, excluding the $4.8 bln sale of Rosneft shares to BP.

Prepared on the basis of the report “Russia and the CIS in 2013” by Sberbank Investment Research.