Both macro and company news was thin on the ground yesterday, and so the market was left to its own devices. The US EIA data at the Moscow market close, however, further highlighted the erosion in underlying demand, as distillates implied demand has now turned negative YoY; all products are now at a lacklustre -8.5% YoY (see the story below). The tug of war between the increase in downside risks to oil prices and the upside risks to the perception of Russia’s investment case promises a rather complex dynamic for the Russian stock
market in the coming months.
To reiterate, with the flexible currency we firmly believe that Oils have a lower beta to oil prices than the domestics (and, yes, our energy team is excited about the message delivered by LUKOIL at the company’s Analyst Day last week; it remains our top pick in the sector). RUB depreciation cushions oil companies’ profitability, while diluting the USD value to the cash flows of domestic sectors (the sharp advance for Banks YTD is very much about the 10% gain in RUB). Other exporters would also benefit from a softer currency. However, until China’s cycle turns the corner (and today’s flash PMI does not point to that as yet) we would remain on the sidelines Steels, while taking an even more cautious stance on Uralkali (as we commented yesterday, the decent price it got from China for 2Q12 does not alter the low capacity utilisation outlook for 2012 amidst soft fertilizer demand).
Otherwise, in this morning’s Gazprom: MET Discussions, our energy team explains that Gazprom’s investment case is not (and has not been for the last several years) about underlying economics or the level of EBITDA (at 2.5x current EV/EBITDA, it is unambiguously cheap on that metric), but about FCF and ‘capex governance’. The government’s increased appetite to generate substantial and sustainable tax income from the natural gas industry might well be the deciding factor for the latter to turn the corner. A subsequent re-rating might well fully overwhelm the dilution of the underlying economics (it is hard to see EBITDA halving as a result of the tax/domestic tariff proposals which are on the table).
As for yesterday’s market action, after the fourth day of the Russian market on a downwards path, the RTS Index is now within striking distance of the lows of 6 March. Overall trading volumes in the market were in line with the 1M average (USD 3.9 bn), which is still below the 2011 averages. The underperformance of Energy names did not develop further; Surgutneftegaz pref. (+1.5%, 0.7x; aided by the anticipation of dividends) even managed a sizable gain, as did TNK-BP (+0.8%). The weakest spots were ENRC (-3%; the company’s 2011 results were not taken positively by the market) and Norilsk Nickel (-3.2%); MMK (+2.1%) behaved visibly better than Metals & Mining at large. Elsewhere, Real Estate continued to catch a better bid, while MRSK Holding (-2.3%) extended the losing stretch of the past three days, continuing to correct after its 70% rally YTD. VimpelCom (+3.0%) bounced strongly on the news that the Algerian government had received a valuation for Djezzy.
For today, flash PMIs in Europe are the biggest piece of macro news. There is nothing of note in the calendar for Russia.