[Bot][An]'s Instablog

Idea: Russian Presidential Rally

Wed, 26 Oct 2011 07:11:37 -0400

At march 2012 we will get name of next (one of previous) President of Russia. It seems to me everybody already know his name, at least guess it. I don't wanna discuss his pros and cons, it is not my business, I ain't political analyst. So anyways President's election will happen and we are waiting for "Presidential rally" at Russian Equity market as ordinary reaction on this event.

Let's take a good look at newest history. At first time, when Mr. Putin won this excited battle Russian Equity Market rose more than 200%. At the second Putin's election MICEX:IND jumped almost 50%. Next time during Mr. Medvedev's Presidential Election was flat because financial crisis happened at that time. But it did not fall. On average base market rose 75% during "Presidential" rally. We are tended to expect bull market during following five or six months.

Additionally, "in 2007 many Russians became shareholders of VneshTorgBank (Bank VTBR:RU) on IPO. They bought it 0.13 rubles apiece. Current price is 0.07.

To return back confidence of future President (Mr. Putin, as you guess it) need to pull it back to 0.13 ruble/share at least. It's a political reason and he has enough numbers of tools to do that, including verbal and administrative" - as Andy Chams, strategist of Vitus Investment said.

So, Gentlemen, it's good time to increase RSX exposition in your portfolios for a nearest five months.

Russian Government privatization plans may lift market to the new highs.

Wed, 15 Dec 2010 19:04:48 -0500

I don't envy short-sellers in Russia.

Currently the budget deficit in Russian Federation is equal 911 bln of Rubles in jan-nov (~$29 bln, wich approximately are equal 10% of GDP), as Russian Ministry of Finance reports. And its value will increase, as Authority expects. Also there are few way to cover budget deficit (there listed in Government's plan). There are:

tax increases,
borrowing (issue bonds at 1 trillion Rubles),
privatization (sell property at 1 trillion Rubles or more).

Early, at November, the Russian government has approved a privatization plan for sale of federal property in 2011-2013. As it expected, revenue of this sell-off could yield 1 trillion Rubles.

MOSCOW, November 17 (RIA Novosti)
The government hopes to get most of the privatization revenues from the sale of shares in ten major state-owned banks and companies. All decisions on the sale of these companies have been confirmed, Nabiullina said.
The list of privatizations includes the sale of shares in oil major Rosneft (RNGZY.PK, 25 percent minus one share), RusHydro hydropower generator (7.97 percent minus one share), the Federal Grid Company of Unified Energy System (4.11 percent minus one share), the country's largest shipping company Sovcomflot (50 percent minus one share), Russia's top bank Sberbank (7.58 percent minus one share), the country's second largest lender VTB bank (35.5 percent minus one share), the United Grain Company (100 percent by 2012), Rosagroleasing agricultural leasing company (50 percent minus one share from 2013), the country's rail monopoly Russian Railways (25 percent minus one share from 2013) and Russian Agricultural Bank (25 percent minus one share by 2015), Nabiullina said.

So ... Goals are obvious: "The government hopes to get most of the privatization revenues". This may mean that tax pressure increases will be delayed for a time, likely, at the first. At the second, Government need to put the stock's price on highest level. It's normal practices of initial offering. They gotta give some positive to markets.

Roadshow started, didn't it? (the greatest Roadshow since 2008)

At Dec 9, 2010 reuters writes
Russia's largest oil producer, privatization target Rosneft (RNGZY.PK), is around three times undervalued when compared to international peers, Deputy Prime Minister Igor Sechin said on Thursday.
"We think Rosenft is undervalued. Compare the structure of Rosneft's reserves and those of (Brazil's) Petrobas (PBR), for example. Rosneft is undervalued by around three times," Sechin told reporters.

And

As interfax reports At Dec 9.
ROSNEFT CHIEF UPS STAKE IN COMPANY FROM 0.0028% TO 0.0051%

Also

Alexey Miller's column
Gazprom is becoming ever more valuable, which is clearly evidenced by the fact that the Company's share value steadily goes up. The Company's capitalization has increased by nearly 35 per cent since the most recent Gazprom Shareholders Meeting.
The global economy is reviving, investors' confidence is growing. By purchasing Gazprom shares, the investors once again cast their vote for the course we have shaped for the Company's comprehensive development on a global scale, they invest funds in the most promising securities putting their trust in the future.
I have no doubt that Gazprom's capitalization will not only reach the pre-crisis level, but go up to its fair value. I give a buy recommendation!

Local TV shows following commercials (or similar, Enjoy, this isn't as boring as commercials of Shell, ExxonMobil, etc)

And more one funny fact: earler, at may, "German Gref, the head of Sberbank, Russia's biggest lender, became a shareholder in the firm for the first time after buying a 0.000004 percent stake worth $2,500, the bank said on Monday." //reuters

to be continued ... (?)

So, when you and authority banded together, you have significantly greater chances for success. Of course it may seem unconvincing for someone, but look it this way: you buy stocks and Government care about the market growth, 'cause they are interested in higher prices, at least till the sell-off.

In fact, Russian stocks are undervalued on comparing to international peers (even taking into account the country risk premium). And this Government media propaganda is able to lift market higher. This is a powerful support for equity prices, for a time. Any way, I don't envy short-sellers.

ETF Overview: Risk Premiums for Some Countries

Sun, 28 Nov 2010 23:46:56 -0500

"RUSSIAN RTS INDEX $ ( RTSI$:IND priced in USD)" trades at eight times earning, meanwhile S&P500 has 14.891 (approximately 13-14 P/E for next year). Assume that US Equity market is correctly priced. So, based on the comparative P/E ratio we conclude that investors agree to pay only 54 cents for one dollar of profit. Is it normal? Let's estimate risk premium for some countries.

Country Risk Premiums.

First of all we estimate equity risk premium (for US market). Assume that risk premium is 4.67% and expected rate of return on equity is equal 7.51% (free risk "plus" risk premium). [see details and "Implied Equity & Country Risk Premium weekly report"]

At the second we need to estimate country risk premiums. There are many approaches to estimate Country Risk Premium. We use following ones: approach based on Moody's Long-Term Credit Rating, based upon AAA-JPM CEMBI yield spread market volatility adjusted and upon the CDS-rates volatility adjusted. [see details]

Finally we compute required rates of return for some countries (as sum of American equity risk premium and country risk). Results see in following table.

What does it means? (Instead conclusion)

Actual current P/E for S&P500 (SPY) is equal 14.891 times earning. Expecting P/E is 13.32. Its very close to some forecasts. Russia (RBL) has 8.22 current and 8.13 estimated P/E. It's close to actual ratio too. In other words 55 cents for one dollar of current profit in Russia is normal. Also Hong Kong trades near its P/E estimation.

Following our results, required rates of return on equity are 12.48, 11.61 and 11.5 for Brazil (EWZ, BRF), China (GXC, FXI, PGJ) and India (INDY, INP,PIN, EPI) respectively. Current earn-prices marks are equal 8.02, 6.85 and 5.74. So Brazilian, Chinese and Indian companies should increase their profit. The expecting GDP's growth looks like the great opportunity for companies from these countries to demonstrate the rising of their earning. Otherwise if they will not use it Investors will be very disappointed (it looks very risky). In a nutshell there are no significant upside potential and very weak downside protection at this moment.

Disclosure: closely watching RSX, SPY, RBL, EWH

Are Russian Gas & Oil Producers really undervalued?

Wed, 10 Nov 2010 19:00:22 -0500

The 4 largest publicly-listed Russian Oil and Gas Producers included in RSX portfolio: OGZPY.PK (7.67%), LUKOY.PK (7.52%), SGTPY.PK (5.38%), and RNGZY.PK (7.76%).
The average P/E of presented Russian companies is equal approximately 5-6 (weighted by market cap). Is it very attractive? I don't think so.

When you invest to emerging you get more risk (it's generally accepted idea). If you get more risk be sure that risk reward is really adequate.

Modern finance theory identifies two components to asset returns: a systematic (oil, gas, gasoline prices; world consumption and supply energy resources, phase of business cycle etc...) component and a nonsystematic, or idiosyncratic, component (regional economy environment, country's/region's monetary and fiscal/taxes policies, cost of mining, etc... for example).

Assume that government bond yield is some measure of region's idiosyncratic risk. And let's compare some well known companies with more then $50 billion market cap by P\E ratio.

We use current stock prices, divided by forecast earnings per share (that well known as P/E ratio). But also we multiply this value by relevant bond yield rate. Thus we get some relative index, which could help us to compare companies from one region with companies from another regions.

A lower value indicates that company is undervalued then other.

So, what should we see? Emerging markets have higher P/E - bond yield ratio then developed. And Russian companies are not outstanding ones on rest emerging background. Of course OGZPY.PK looks undervalued, little bit. But the prospective payoff is approximately 30-50%. Also SGTPY.PK is likely little bit less then other companies. But basically Russian Oil & Gas industry have the same valuation that emerging.

Related ETF: Market Vectors-Russia ETF (RSX)

Disclosure: hold OGZPY.PK, LUKOY.PK, SGTPY.PK, and RNGZY.PK

Comparing Country ETFs By P/E - Government Bond Yield - GDP

Fri, 02 Jul 2010 15:54:17 -0400

Some countries have low P/E ratio, while other, by contrast, high. But this does not mean, that some countries are more attractive for investors, then other. So this simple compare may be useless. Actually, countries have different P/E ratios, but also they have different interest rates.

Let's follow the "FED" model. This comparison is more adequate. So, P/E ~ 1/r, where r is 10 year Government Bond yield. Or (P/E)*r=k, where k is adjustment coefficient. In general, Lower k may indicate cheaper equity market (under-priced or troubled). At least, lower k (k<1) means that stock price is less then it's theoretical value.

What about GDP expectation?

OK. Let's include this parameter in our model. Actually, you don't find any strong relationship between GDP and P/E (or r*P/E) on historical data. However, higher GDP indicates stronger economics. Hence, higher GDP may indicates more attractive environment of country's equity market.

Thus, most attractive countries correspond to points at the bottom-right on diagram (see below). Conversely, overvalued markets at the background of weak GDP situated top-left on figure. Data and data sources.

Data (t1.bmp) | Source (Source.txt)

Conclusion: obviously, China (GXC, FXI, PGJ) is leader. Chine will stay leader, even GPD forecast reduce to 6%. Hong-Kong (EWH) and Singapore (EWS) are another most atractive countries. Concerning India (INDY, INP, PIN, EPI), I am not assured: strong GDP forecast, but equity market is overvalued. Brazil (EWZ) also have most overvalued k ratio and 5.5% GDP. Canada (EWC), USA (IWV) and Russia (RSX) are somewhere in the middle of our rankings. So I don't find Russian Markets very attractive. Switzerland (EWL) and Germany (EWG) are most preferable in Europe.

Disclosure: Cut long RSX