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10 Sep, 2008 14:21

Stocks tumble as skittish investors bail out

Russia’s stock markets have fallen to their lowest levels since 2006, with Tuesday and Wednesday seeing the biggest 2 day fall since December 2000. Redemptions from investors and margin calls, coupled with geopolitical

If investors thought that Wednesday was to provide something different to the ski slope chart that appeared on their screen mid Tuesday afternoon they were soon disabused.  The sell off continued through the morning session unabated – with the release of 2Q GDP data barely interrupting the flight.  For those that did take a glimpse at the figures it was at an annual rate of 7.5%.  Anywhere else that would be cause for some joy, but for Russia it means that the economy is slowing.  Erik DePoy, Equity Strategist at Alfabank thinks its a matter of the economy easing after a couple of years at full steam, and that there is plenty more growth ahead.

“I still believe that this is a correction, and the long term trend is for growing earnings.  In the market macroeconomic indicators are coming off a bit but they are still very, very strong and in the longer term the trend is based on fundamentals.”

Finance Minister Aleksei Kudrin believes the sell off has been driven by fears about the global credit outlook, and easing oil prices, rather than concern about Russia’s economic outlook, with geopolitical tensions about Georgia playing a minor role as well. 

“The fall in the Russian stock market mainly has to do with the global financial crisis and liquidity shortage. Countries with emerging economies are the first ones money is withdrawn from in situations like this. In January-February 2008 over $20 Billion were taken out of the Russian economy. The events in Georgia certainly contributed to the money outflow as well, but much less than the financial crisis, oil price fall and exchange rate change.”

If the Georgia tensions haven’t been a direct driver of the sell off, they have been something of a turning point, with the markets heading lower after Russia’s intervention.  This isn’t the first time the markets have taken a turn for the worse this year.  But it’s come against a backdrop of negative news about Russia’s business world – with the now resolved TNK-BP dispute, and revelations of transfer pricing in the mining sector, amongst other issues, not helping local sentiment – and GDP data for the Eurozone and U.S., coupled with near panic in international financial markets, adding to sepulchral sentiment globally.  Erik DePoy thinks it all adds up to undue negative sentiment when it comes to Russia.

“The reality is, yes, the Russian market has done very poorly. But it hasn't been the worst market this year. We were looking at the graph of the Chinese Shanghai Composite index – that's down 60 percent. So the question is, why is China getting a pass in the media, while Russia's getting beaten down almost on a daily basis?”

The other negative development which has come from the Georgia tensions has been the outflow of capital.  This has seen the Ruble fall to its lowest level in more than a year, bringing with it attendant financing problems for Russian companies, a further brake on growth, and more complications in the fight against inflation.

Despite this, many market watchers think the Russian market is close to a bottom, with the country’s sound macroeconomic fundamentals and growth outlook likely to come back into focus.  And that with the valuations of some Russian companies now quite cheap, some good buying opportunities are presenting themselves.