Russian stocks prepare for 2010 upside

2009 saw the Russian stock markets stage a remarkable comeback. From being a bottom five performer in 2008, it was the second best performing equity market in the world this year

If 2009 was the year of Russian equity rebound, the question on many lips is whether 2010 will be the year of sustainability. The road to global economic recovery is not a straight one, and stumbling blocks could derail recent growth, according to Yaroslav Lissovolik, Chief Economist at Deutsche Bank Russia and the CIS.

“There are significant headwinds, significant risks going into 2010. Most significant for a lot of investors is dollar strength, the strengthening of the dollar versus the euro is likely to have implications for the rouble as well… Oil prices – yet again a major risk for 2010 because even as global economy recovers from recession, factors such as the stronger dollar or withdrawal of fiscal stimulus leading to deceleration in economic growth – all of these factors can lead to a bit of a reduction in oil price. So this of course is one of the key risks for Russia in 2010 – because Russia is still very dependent on the oil price.”

Even so, 2009’s stellar performance is prompting a positive outlook for 2010. Leading Russian brokers all forecast at least 30% growth for the RTS. Falling interest rates in Russia, and an improving domestic economic outlook should sustain momentum, even in the face of withdrawn fiscal stimulus in China and the US. But, as ever, the key is that oil prices stay high.

Tapping into new foreign investment will also be crucial. As many domestic investors remain cautious and wiped-out, Russian equities need to catch the eye of global players with risk appetite. Kevin Dougherty, Portfolio Manager at Pharos Financial Group, says oil and commodity prices will be the key factors.

"If we see oil at 70 dollars or above, that’s going to be very bullish for Russia and will draw money in from the outside. But that money – that Asian and North American money will very much depend on the path of commodity prices through the year."

Under valued, domestic focused stocks may be the best way to play on a positive domestic environment, even if the international environment remains fragile, according to Lissovolik from Deutsche Bank.

"Our top picks would include gazprom – really cheap at this stage, we also like lukoil in the oil sector. After the run that a lot of the consumer stocks had we are looking more at telecoms, including companies such as VimpelCom as the preferred way of playing the recovery in domestic consumption."

That's expected to attract investors with a healthy appetite for risk. But high commodities prices and a weak dollar will be crucial if Russian equities are to weather the volatility of 2010.