Russia had been on a tear until mid-April, when fears that financial turmoil in Greece would spread sent stock markets around the world into a nosedive. The benchmark Russian Trading System index hit a 2010 high of 1,676.27 on April 15, for a 12-month gain of 108 percent, but by May 20 had tumbled more than 22 percent, to 1,303.24. Nonetheless, many economists remain confident of a quick recovery.
“At a time when there are still sovereign risk issues elsewhere in the Western world, Russia looks quite appealing in comparison,” says Paolo Zaniboni, London-based head of equity research at Troika Dialog.
Alexei Moisseev, chief economist at Renaissance Capital in Moscow, agrees. “Global investors are increasingly turning their attention to emerging markets as a place for higher and, these days, safer returns,” he says. “Russia has been able to benefit from such interest as an emerging market and also as a key commodity producer, which has resulted in a significant pickup in investor interest.”
Investors leery of Western financial turmoil are clamoring for insight into Russia’s relatively safe havens, and they say the firms that do the best job of providing the type of guidance they need can be found at RenCap and Troika. The two outfits share top honors on the 2010 All-Russia Research Team, Institutional Investor’s seventh annual ranking of the nation’s top equity and fixed-income analysts. RenCap appears in the No. 1 spot for a seventh consecutive year; Troika is enjoying its first visit to the winner’s circle, having spent the past two years in second place. The firms capture 13 team positions each.
Deutsche Bank, with seven positions, holds steady in third place. VTB Capital jumps from No. 7 to No. 4 after tripling its number of positions won, to six. The biggest mover is Credit Suisse, which soars from ninth place to fifth; the Swiss bank claims three positions. Results are based on responses from more than 280 buy-side analysts and portfolio managers at some 222 institutions worldwide overseeing an estimated $146.6 billion in Russian assets.
Last year’s market rebound, which followed the RTS index’s jaw-dropping 72.4 percent loss in 2008, can be traced to steps the Russian government took to contain the damage, including devaluing the ruble and propping up the nation’s banking system, analysts say. In addition, the country’s low sovereign-debt burden — roughly 7 percent of real gross domestic product, compared with, say, Greece’s 115 percent or Japan’s 200-plus percent — has helped create a surge in the Russian bond market, which has further paved the way for a full market recovery.
Russia officially emerged from recession in the third quarter of last year, after two consecutive quarters of negative growth; even so, its GDP contracted by 7.9 percent last year, just under the 8.5 percent decline that the country’s economic leaders had forecast.
“The Russian government has used a very aggressive approach in fighting the crisis, which included a large-scale use of oil reserves built in the years prior to 2009 and a very efficient set of policies to support the banking sector, which has contributed to a quick rebound,” says Moisseev, who is ranked second this year in Economics. “Plus, a favorable external environment — a quick rebound in commodity prices — helped a lot.”
RenCap took the rise in the markets as an opportunity to begin rebuilding its research department, which shrank from 38 analysts at this time last year to as few as 21 but is now back up to 27.
Troika held its research department head count steady, at 28 analysts, but expanded coverage by ten stocks in the Consumer, Metals & Mining, Oil & Gas and Real Estate sectors, for a total of 140. “We try to ensure that our sector teams are well resourced enough to be able to dig deeper down to the small- and midcaps,” Zaniboni says. “We are not looking to hire high-profile senior analysts, but are looking to potentially hire more junior analysts to help support the increased workload.”
Zaniboni says his team plans to focus on the wave of initial public offerings expected to take place this year and anticipates initiating coverage on ten more stocks by year-end. Russia’s IPO market stalled in the wake of the credit crisis — there was only one last year — but January 2010 saw the $2.24 billion IPO of United Co. Rusal, the world’s largest aluminum maker. IPOs for more companies are expected in the coming months, including steel producer Metalloinvest Holding Co., food retailer Victoria Group and machinery manufacturer Concern Tractor Plants.
Analysts at Credit Suisse also have been following a greater number of stocks, according to István Máté-Tóth, the firm’s director of research for Emerging Europe, the Middle East and Africa. “We have continued to increase resources dedicated to the Russian market and have deployed more resources on the execution and distribution side,” says Máté-Tóth, who is based in London. Credit Suisse’s 12 analysts cover 68 stocks, up from 49 last year, and “we will continue to increase research deployment,” he adds.
The reason? Russia is better positioned to enjoy growth than many other markets. “If you look at the macro fundamentals in Russia from a global context, the country has a strong balance sheet and is one of the major global producers of a number of resources, such as metals and mining,” Máté-Tóth points out.
Metals & Mining has been one of Russia’s most dynamic sectors over the past year, gaining 132.2 percent in the 12 months through April, and no analyst has done a better job of covering those companies than Troika’s Mikhail Stiskin, who catapults from runner-up to claim first-place honors for the first time.
Stiskin’s best calls of the past year include a September valuation-based upgrade from hold to buy on the American depositary receipts of Norilsk Nickel, the world’s leading producer of nickel and palladium, at $10.25. The Moscow-based analyst told clients that the market’s fears over corporate governance concerns the company faced, including a number of alleged minority shareholder rights’ violations during the summer of 2008, were overstated. He also argued that the market was underestimating the Moscow-based company’s ability to generate cash flow, given declining costs and rising prices. He was right. The ADRs had rocketed to $19.20 by late April, a gain of 87.3 percent that bested the sector by 14.7 percentage points.
Stiskin holds a bachelor’s degree in economics from the Moscow State Institute of International Relations and a master’s degree in applied economics from the University of Michigan in Ann Arbor. He joined Troika in 2006.
Real Estate is another sector enjoying a resurgence after having been hammered by the recession. Previously unranked Julia Gordeyeva of Deutsche Bank shoots straight in to the No. 1 spot thanks in part to contrarian views that worked out very well for investors. Case in point: Last August, Gordeyeva published a bullish report on Russian real estate developers, and among the stocks recommended was Moscow-based homebuilder PIK Group. The company had defaulted on its debt, but she believed its stock had the most upside potential in the sector, owing to its distressed valuation.
“We took a bold view that the company would restructure its debt and be back in business within the next 12 months, trading at ‘going concern’ instead of distressed valuation,” Gordeyeva says. She was right. Through late April the stock had gained a stunning 234.4 percent, from $1.60 to $5.35.
Gordeyeva, 33, earned a bachelor’s degree in chemistry and math at New York University in 1998, then joined J.P. Morgan Investment Management in New York, where she spent four years as a portfolio and equity research analyst on the global emerging-markets team. In 2006 she moved to ING Bank’s Moscow office to cover Russian consumer, media and transportation stocks, then joined Deutsche Bank in 2008.
Stocks in virtually all sectors realized strong gains over the past year, but that came as no surprise to Kingsmill Bond, who captures the crown for the first time in Equity Strategy after spending two years at No. 2. The Troika Dialog strategist, who is based in Moscow, turned bullish on Russian equities way back in February 2009, when stock prices were still sliding, because he believed that the Kremlin’s attempts at damage control, especially ruble devaluation, would reverse the market’s downward spiral.
Bond’s picks of the past year include a May 2009 buy recommendation on the nation’s largest bank, Sberbank, whose price had plunged to 84 cents in response to investor concerns about the Moscow-based institution’s debt levels and rising number of nonperforming loans. Telling clients that such fears were overstated, he emphasized the bank’s strong growth prospects and said it was poised for a rebound. It certainly was. By late April the stock had skyrocketed 221.4 percent, to $2.70.
A 1992 graduate of Cambridge University with a master’s degree in history, the 42-year-old Bond trained as an accountant before joining MC Securities as a fund manager in January 1996. The following year he moved to Deutsche Bank, where he worked as an emerging-markets strategist, then joined Troika in 2007.
Stocks haven’t been the only strong performers. “Yield for the Russia 30 Eurobond, the key benchmark, dropped from 10 percent in January 2009 to 6 percent in April 2010, driven by the rapid recovery of the commodities markets, especially oil, and the excessive amount of liquidity on the global markets, which fueled demand for emerging-market assets,” Zaniboni says.
Simply put, “2009 was a good year for fixed-income investment,” adds RenCap’s Nikolay Podguzov, who leaps from third all the way to first place in Fixed-Income Strategy. In May 2009, Podguzov made a strong call on the ruble bond market and urged clients to buy City of Moscow ruble bonds. His recommendation included the Moscow-44 June 2015 bonds, which at the time were priced at 72.72, with a 15 percent yield. By mid-May 2010 the bonds were trading at 97.80, and the yield had narrowed to 8.15 percent, he says.
Podguzov, 35, earned a bachelor’s degree in economics at Moscow State Institute of International Relations in 2000, then joined the Russian Ministry of Finance’s debt-management department. In 2003 he accepted a position as fixed-income strategist with Trust Investment Bank, and three years later he joined RenCap.
Strategists are playing an increasingly prominent role in research department operations, in Russia and elsewhere, as governments enact legislation to not only reassure skittish investors but also minimize the chances that another financial crisis will roil world markets.
“Since the onset of the financial crisis in this part of the world, investors have paid greater attention to macroeconomic fundamentals than in any period since late the 1990s,” says RenCap’s Moisseev. “All of a sudden, government decisions and macro data became more important than the quarterly reports as, like everywhere in the world, the state started to play a key role in deciding who will survive in the next cycle.”
Given current fears that economic contagion in Europe will spread, it’s unclear which companies will survive in the long run, but it’s a safe bet that the world will always welcome top-notch research, such as that provided by the members of the 2010 All-Russia Research Team.