The forecast was blown away

Troika Dialog expects the RTS index to be 2,200 points by the end of the year

Internal political events in Russia at the end of summer shook the optimism of investors and analysts, forcing them to reconsider their views on the medium-term prospects of the stock market. Analysts at the Troika Dialog investment company set a fair level for the RTS index at the end of the year at 2,200 points. They explain this by political and legal risks, as well as falling oil prices.

At the beginning of June, Troika Dialog predicted that by the end of the year the RTS index would reach 3,000 points. According to her review at the time, oil prices above $100 per barrel were attracting investors to the Russian market, despite the ongoing liquidity crisis. Other investment companies also painted rosy prospects, predicting the index at 2700-3000 points.

Analysts at Troika Dialog note that investors are clearly pricing Russian shares at a higher discount, taking into account legal and geopolitical risks, than in its valuation model. Experts from other financial companies also point out in their forecasts the significant role of political risks. “In general, the fate of the market depends on the further degree of tension in relations between Russia and the West regarding the Caucasus,” notes Alexander Razuvaev, head of the market analysis department at Sobinbank. -- It is highly likely that Russia will recognize the independence of South Ossetia and Abkhazia. If the West's reaction is sharp, we can expect new massive sales and a decline in the RTS index to 1,100 points. However, if the foreign policy situation does not worsen, we can expect some recovery in the market, especially given Gazprom's strong export earnings in the second half of the year and expectations of strong consolidated results from Russian oil companies for the second quarter. We still believe that even if the market falls sharply soon due to the new political negativity, the year will end with zero profitability.” In his opinion, in 2008 the RTS index will close around the 2300 point mark. Let us recall that at the beginning of the year the index value was 2290 points.

Analysts at Finam Investment Company predict that by the end of the year the RTS index will rise to 2550 points. VTB-24 changed the forecast from 2800 to 2500 points. However, as Stanislav Kleshchev, an analyst at the VTB-24 investment department, notes, the forecast adjustment is mainly due to an increase in borrowing costs for Russian issuers. “We do not include political risks associated with the conflict in South Ossetia in our forecast,” he notes. “Although some Western investors do this.”

According to Troika Dialog experts, “it will take more than just time to bridge the gap between the current price and the fair one, and the traditional September rally will not help here.” Most likely, changes for the better will come in 2009, the authors of the review believe. The cost of capital will not fall until Russia's relations with the West improve, significant progress is made in reforming the legal system, and pension system reforms begin, which will provide an incentive for domestic capital to fill the funding gap. “Profit growth will require that fears of a slowdown in global economic growth subside, oil prices rise, or the tax burden on the oil industry decrease,” the analysis says. According to the calculations of Troika Dialog specialists, in 2009, almost 79% of the total forecasted profit of companies whose shares are included in the calculation of the RTS index will be provided by producers of raw materials, with 61% of the profit coming from the oil and gas sector. In addition, in the event of a slowdown in global economic growth, investing in shares of the Russian metallurgical sector is much riskier than investing in shares of gas producing companies. If steel prices drop by 10%, metallurgical companies will see a drop in profits of more than 30%, and for gas producers - less than 10%.

Nikolay KOCHELYAGIN