Is it time to buy Russian securities?

If the situation is described by the slogan “swoop in - it’s cheaper!”, this does not mean at all that you need to sweep away everything. The fall in prices for Russian shares, already cheap, is also not a reason for excessive greed. But it is quite possible that investors who returned to the market last week were right.

"Bottom or not bottom?" — in mid-March there was not a single participant on the Russian stock market who did not ask this question
Photo: Yuri Martyanov, Kommersant / buy photo

ALEXANDER ZOTIN

“You should buy stocks when there is blood on the streets” - that old investor maxim attributed to John Rockefeller, Bernard Baruch and Warren Buffett, fortunately, did not apply to the Russian market collapse in early March: the annexation of Crimea into Russia was surprisingly peaceful. But the drama on the stock market still played out.

On Black Friday, March 14, the RTS dollar index dropped to 1016 points during the day, while on February 28 it closed at 1267 (the drop at the lowest point was more than 19%). The MICEX ruble index suffered a little less - the collapse was dampened by the depreciation of the ruble. On March 14, it touched a daily low of 1,182 points, losing more than 18% relative to the “pre-Crimean” level on February 28 – 1,445 points.

The beginning of the week after the announcement of the results of the Crimean referendum and the admission of Crimea and Sevastopol to the Russian Federation brought some relief to investors (by the end of trading on March 19, the RTS index recovered to the level of 1158 points, the MICEX to 1319). However, the market managed to win back only half of the fall.

The main driver of purchases on March 17-18, according to analysts interviewed by Dengi, was the closing of short positions by short sellers and the weak “sanctions” reaction of the West to the entry of Crimea into the Russian Federation. Representatives of Sberbank did not answer the question of “Money” whether Russian banks bought their securities, and VTB limited its response to the statement that “VTB quotes are formed only on the basis of market conditions.”

Broken cans

The fall and subsequent rebound not only made the Russian market cheaper, but also changed its configuration. Investors overestimated the prospects of individual companies in the new reality. Shares of some companies even rose.

Thus, among the “blue chips” (the most liquid shares of the largest Russian companies included in the MICEX 10 index), both the leaders of the fall and the stable securities stood out clearly. Among the hardest hit are two state-owned banks. Sberbank shares fell from the pre-crisis level to a minimum on March 14, losing more than 28%, VTB shares - more than 29% (during the day they broke through the symbolic level of 3 kopecks per share, despite the fact that the bank's "people's IPO" took place in May 2007 at a price of 13.6 kopecks). At the close of March 19, the recovery is only partial: VTB is losing more than 18% of the pre-crisis level, Sberbank - more than 11%.

There are several reasons. Firstly, the cooling of relations with the West could accelerate Russia's entry into recession (for more details, see "Signals of the lean times, pp. 16-17). And the banking business is traditionally hypersensitive to the state of the economy. Entering into a recession will mean an increase in bad loans and a drop in demand for loans. Secondly, VTB and Sberbank are state-owned companies, and a possible tightening of Western sanctions could hit them. Thirdly, unlike exporters, Sberbank and VTB, according to UBS, are not beneficiaries of the devaluation of the ruble - their profits are almost. completely dependent on the domestic market.

And finally, fourthly, Sberbank and VTB have business in Ukraine - the share of Ukrainian subsidiaries in the capital is 0.7% and 1.5%, respectively. Dmitry Shagardin, head of the trust management department at KIT Finance Broker, believes that the presence of these banks on the Ukrainian market may be perceived by investors as an additional risk factor.

By the way, nervousness in the market also led to a revision of devaluation expectations - HSBC bank changed the forecast for the end of 2014 from 35.4 rubles/$ to 37.5 rubles/$. This factor has previously put pressure on companies whose profits in dollar terms are declining due to the fall of the ruble. Now this pressure may increase even more - if you believe the forecasts that indicate the strengthening of devaluation trends in the “post-Crimean” reality. First of all, this concerns the telecommunications and retail sectors. The only blue chip of Russian retail, Magnit, fell slightly less significantly than banks - by 24% from the closing level on February 28 to the low of Friday, March 14. Theoretically, the retail sector, just like banks, is very sensitive to the internal economic situation: recession and cooling of retail lending are not the best concomitants of consumer demand.

Exporters of peace of mind

Shares of exporters resisted the fall better. “In the long term, a slight weakening of the ruble, 10-15%, will have a positive impact on the economy,” says Ivan Fomenko, head of the trust management department of Absolut Bank. “First of all, exporters benefit, who, with a constant external environment, earn more rubles at the same level ruble costs. In this case, an increase in quotations should follow after the negative effect of the “war” time passes.”

But even among exporters there are leaders and outsiders. Gazprom shares did not look very good - a fall of 18% from the level of February 28 to the intraday bottom on March 14 (by the end of trading on March 19, the “Crimean” discount was slightly less than 10%). Gazprom's quotes, despite its "protective" status as an exporter, changed almost all the time along with the broad market. Investors are concerned about Ukrainian gas transit and possible sanctions from the EU. In addition, UBS economists warn that the European Union Competition Commission is preparing an antimonopoly lawsuit against Gazprom in the amount of up to $15 billion. However, Gazprom shares were cheap by all major multipliers even before March 2014. For example, the current P/E ratio, according to calculations by KIT Finance Broker, reached 2.7 (the company's value is only 2.7 annual profit), and the capitalization of the largest company in Russia fell below $80 billion this March (in June 2008 The head of Gazprom, Alexey Miller, said that capitalization in seven to eight years would reach $1 trillion).

Rosneft is doing better, the intraday peak of the “Crimean” fall is only 10% (by the close of March 19 it was corrected to 5%). But there are problems too. This is a huge debt - UBS analysts give a figure of $71.2 billion and note that due to the current situation, the cost of servicing it may increase; In addition, the structure of Rosneft's costs and sales is such that the company, unlike most other exporters, is not profitable from a fall in the ruble.

Surgutneftegaz and LUKOIL held up well on the stock front. The first fell on Friday, March 14, by 8% from the closing level on February 28 (the “Crimean” discount by the end of trading on March 19 was 4%). The company holds about $30 billion in its accounts, and this airbag makes its shares a protective security. The market traditionally considers the company’s opaque ownership structure to be a disadvantage of the chip. LUKOIL fell on “Black Monday” by 12% by the close of the previous trading day, but by March 19 it partially won back this collapse (the “Crimean” discount reached the same 4%). LUKOIL is a private, transparent company (minimal risk of sanctions), as well as an exporter that receives additional income from the devaluation of the ruble. In addition, the head of the company, Vagit Alekperov, purchased additional shares of LUKOIL for $147 million in the first quarter of 2014 (Bloomberg data).

Norilsk Nickel became the leader in fall resistance. Its shares fell on Black Monday and Black Friday (March 3 and 14) by only 7% relative to the closing price on February 28. This is the best result among blue chips. Despite these two short drawdowns, the company's shares managed to reach a two-year high amid the market decline. At the end of trading on March 19, they were worth 0.6% more than the February close. The growth factors are clear: a private company with effective management, a comfortable level of debt (just over $5 billion), with the greatest benefit among blue chips after Surgutneftegaz from the devaluation of the ruble (UBS data). Plus, the situation on the nickel market is excellent - prices are rising due to a stop in the supply of Indonesian nickel ore to the world market.

Give a dividend!

Another sustainability factor is the stock's dividend yield. In 2013, it averaged 4.4% in our market. This is one of the highest rates in the world, which is not surprising given the general cheapness of Russian chips. But now dividend aristocrats will be especially popular, because the yield of some securities is approaching the deposit one.

“In the context of the stagnation of the Russian economy, we rely on dividend stories and buybacks,” says Dmitry Shagardin from KIT Finance Broker. “For long-term investments, we consider Norilsk Nickel, MTS, Surgutneftegaz (preferred shares), NOVATEK and Phosagro attractive "".

The reason for buying Russian shares is that they are fundamentally undervalued and oversold after the March fall. Arguments against it include the uncertainty of the political situation and emerging problems in the economy. The brave ones should pay attention to the fact that the reasons for weakness or, on the contrary, stability, which played during the March fall, will most likely continue to be a guide for investors. The rules of survival in the new conditions seem to be simple: private companies are preferable to state-owned ones, exporters are preferable to companies focusing on the domestic market, and those paying high dividends are preferable to stingy ones.

Dividend Aristocrats

Expected
dividend
profitability
(% current
quotes)

Bashneft	10.6
Surgutneftegaz,	10.0
priv.
MTS	8.6
Rostelecom	8.4
Tatneft	7.7
Norilsk Nickel	7.2
Megaphone	7.1
Aeroflot	6.5
LUKOIL	6.5
Gazprom	6.0

Source: KIT Finance Broker.

Shares on the Crimean wave