Stock market review for July 27, 2008

July 27, 2008 

CURRENCY MARKET

According to last week results US dollar rate to ruble grew. On Friday, August, 1, the official rate of Central Bank of the Russian Federation was 23.4186 RUR/doll. Thus, as per week results, dollar went by 4 kopecks up or by 0.17%. Quotations movements at the international stock exchanges have mainly influenced the dynamics of dollar rate at the Russian internal market, as market value fluctuations of bi-currency basket have been insignificant. According to the week results, dollar rate grew to euro at Forex, and American currency was traded at around 1.55 doll/euro level on Friday. The core factor of movement of currencies’ rates on international markets was macroeconomic statistics.

The week has started rather negatively for the US dollar: FRS representative, G. Stern, was quoted as saying that the situation could worsen at the lending market, and IMF published its forecast where it had been marked that it did not observe signs of mortgage crisis stop in the USA. Nevertheless, dollar strengthens to the core world currencies by mid-week already. The reason is continuing oil prices drop, and that increases probability the US economy avoids recession. Also, positive statistics of consumer trust in the USA provided dollar support. Data about GDP published on Thursday, as well as about primary appeals of unemployment, turned out worse than it had been expected, and that resulted in dollar rate drop. However, the American currency has quickly regained its positions after negative data about retail sales in Germany had been published, as well as due to the fact reduction of workplaces number in the US economy turned out lower than it had been forecasted.

During current week FRS of the USA, ECB (European Central Bank) and Bank of England will hold meetings, where decisions about refunding rates will be taken. Obviously, the rates remain without changes; however, comments of officials, accompanying decisions about the rates, will be of vital importance for the further dynamics of currencies’ rates.

At the Russian currency market, ruble quotations have mainly followed "euro-dollar" pair movements. Judging by the current factors, this week is possible small ruble rates’ raise to dollar. In the long-term prospect considerable strengthening of the American currency is not expected as the USA trade deficit remains high, and dollar reduces its value as the world reserve currency step by step. Moreover, ruble strengthening to currencies basket will obviously continue.

Forecast: within current week is possible ruble rate rise to dollar.
Investment activities: obviously, ruble strengthens against dollar in the long-term period.

BOND MARKET

Last week was again rather volatile. Among the most important events for the financial world one should mark insufficient data about the USA GDP and quite negative FRS officials’ comments concerning the American economy state that intensified investors’ anxiety, as well as encouraging news about co-operative activities holding by FRS, ECB and National Bank of Switzerland to maintain liquidity at the global markets. On the whole, the week did not bring any certainty to market participants.

Last week the Russian debt market has ended in the negative. External demand was minimized as nonresidents overestimated risks of investing into the Russian market, and reduced volume of available facilities at large players restrained internal demand. Situation at the monetary market did not favor purchases in the bond sector: tax payments caused partial liquidity elimination; moreover, it became known Central Bank of the Russian Federation would bring other anti-inflationary measures into effect. The Russian regulator has again established norms of obligatory reserves, and now market participants expect next increase of interest rates. Due to lack of substantial and positive news, as well as stimuli for growth, RCBI price index has gone by 0.62% down within a week, and RCBI-c index that, except for a change of market prices value, takes into account coupon profit as well, has gone by 0.57% down and attained 159.25 points mark. Prices dynamics of ruble bonds listed among clients’ portfolios had different directions: first tier (+0.42%, YTM 6-8%), second tier (+0.06%, YTM 9-11%), third tier (+0.15%, YTM 11-14%).

Forecast: within current week consolidation at the current levels is expected at the market of ruble debt. Growth is possible in some issues of the first tier that managers of Housing and Utilities Fund facilities are interested in.
Investment activities: current levels are quite attractive to purchase ruble bonds. Preference is given to the second tier, as it is less influenced by unstable external situation.

EQUITY MARKET

During last week RTS (Russian Trading System) index lost 0.49%, and MICEX (Moscow Interbank Currency Exchange) - grew by 0.37%. Banking sector became the leader by drop: -2.4%, oil companies lost 0.07%, stocks of metallurgy companies, just the opposite, regained after the Friday drop: +1.67%. Among the most important weekly events one can name publication of the USA GDP for 2Q 2008 that turned out lower than it had been expected, the disappointing report of General Motors for 2Q 2008, as well as the range of encouraging statements of Russia’ president Dmitry Medvedev concerning cooperation of the government and business after criminal cases against Raspadskaya and Evraz have been brought.

On Monday, July, 28, after the Friday collapse, the Russian market was giving hope for the rapid correction, but by workday-end was information about new uncomplimentary remark on Mechel on the part of prime minister V. Putin. As a result, the Russian trading floors ended the day in minus: RTS lost 1.16% lost, MICEX - 2.08%. On Monday, metallurgical holding Severstal published positive operating results for 1H 2008, but the overall negative situation and growing political risks did not let securities to react to good news: by day results, the securities lost 1.24%. On Tuesday, July, 29, oil futures were going down, and the political risks of investing into the Russian companies’ securities did not back out. According to the day results, core issuers in the oil sector demonstrated negative dynamics; so, Lukoil lost 2.9%, on the background of statements about intention to attract $1 billion participation loan to expand into the foreign markets. Securities of Gazprom Neft lost 5.66%, Novatek - 2.04%. And, on the opposite, state-owned companies Gazprom and Rosneft grew by 0.96% and 2.69% up respectively. Fear of political risks and trust in companies affiliated with the government proved quotations growth of MMC Norilsk Nickel by 4.93% after candidature of the current RussiaTourism head V. Strzhalkovskiy had been proposed for the position of the company head. According to the day results, RTS lost 1.68%, and MICEX - 1.18%. On Wednesday, July, 30, bears backed out and fixed an income: RTS index grew by 2.95%, and MICEX - by 4.32%. On Wednesday, metallurgical sector started gradual recovery: NLMK (Novolipetsk Steel) +4.62%, Severstal +10.02%, MMC Norilsk Nickel +7.85%, MMK (Magnitogorsk Iron and Steel Works) +6.25%. Investors assumed that at record high prices on steel the companies were too cheap to sell further, and bears closed short positions, and in terms of that, quotations went up. On Thursday, July, 31, president of the Russian Federation D. Medvedev asked the authorities "not to frighten the business", and that would urge investors to invest into the Russian companies, but the report about the USA GDP for 2Q 2008 was quite negative and disappointed investors, as it was worse than it had been expected: 1.9% against 2.3%. The day result was MICEX index drop by 0.39% and RTS index growth by 0.91%. On Friday, August, 1, General Motors provided bears with additional push: according to 2Q 2008 results the company lost $15.5 billion. According to trades results on August, 1, MICEX index went by 0.19% down, and RTS classical index - by 1.27%.

Overall, during the last week the market was characterized as being high volatile. Some securities ended the week in plus, but, nevertheless, they have to reach former levels. Political risks remained the same, and investors are not ready yet to trust in safety of the Russian assets, even despite encouraging statements of D. Medvedev. Data about economic activity index of the Russian producers published on Friday show deceleration of the Russian production, and that one more time confirms the June data about slowdown of production growth to 0.9%.

Moreover, the world economic situation does not encourage at all: unemployment number in the USA grows, GDP falls, banks can write off billions of dollars more as per 3Q 2008 result. Lehman Brothers declared about intention to sell mortgage loans package at $30 billion. Investors already assume, the bank can repeat Bear Stearns fate.

Stocks-indicators: stocks of companies listed in MICEX index settlement showed different dynamics: Aeroflot, ao (+0.95%), AvtoVAZ, ao (-11.96%), Severstal, ao (+10.67%), Hydro OGC, ao (+8.54%), Gazprom, ao (+1.49%), MMC Norilsk Nickel, ao (+9.99%), MMK, ao (+1.52%), Lukoil, ao (+0.01%), Bank of Moscow, ao (+1.16%), Mosenergo, ao (-2.41%), MTS, ao (-0.34%), NLMK, ao (+5.31%), Novatek, ao (+1.37%), OGC-3, ao (-4.32%), OGC-5, ao (-2.29%), PolusGold, ao (-15.93%), Polymetal, ao (-2.68%), RBC, ao (+0.93%), Rosneft, ao (+5.64%), Rostelecom, ao (+2.14%), the Savings Bank, ao (-3.71%), the Savings Bank, ap (+2.37%), VTB Bank, ao (-3.84%), Gazprom Neft, ao (-6.46%), Surgut NG, ao (-1.38%), Surgut NG, ap (-4.83%), Tatneft, ao (-4.06%), Transneft, ap (-8.89%), UralSviazInform, ao (+0.00%), VolgaTelecom, ao (-10.32%).

Technical analysis: within last week the Russian stock indices have demonstrated different dynamics. RTS index went by 0.49% down, MICEX index grew by 0.37%. Overall, equity market dynamics was neutral. After RTS index drop to 1880 points and rise up from this level, one could notice first signs of falling tendency recovery. During current week the equity market can recover to 2020 points level by RTS index. RTS index fall to 1915 points level is not eliminated at the beginning of the week. RTS index resistance - 1940 and 1998 points levels. Support levels - 1940, 1915 and 1880 points. Forecasted range of RTS index change totals 1915 - 2020 points within current week.

Strategies: current week is favorable to form portfolios of such strategies as "Long-term capital increase" (5), "Balanced profit"(5), "Stocks of small capitalization companies"(5), "Trend"(5), "Capital security" (5), "Current profit"(5), "Aggressive bond"(4).
Forecast: during current week are held meetings of FRS (on August, 5) and ECB (on August, 7), and investors do not expect the rates change. An important event at the Russian market will be decision about new allowances granted to the oil industry. If positive decision was taken, it would result in oil securities growth. Volatility at the market keeps. On the whole, within current week one can expect equity market growth.

Investment activities of active strategies: Equity market growth at 1880 points mark by RTS index RTS during last week, shows probable tendency change of the last weeks.
Investment activities of passive strategies: At the current moment, there are favorable terms to form portfolios of long-term fundamental strategies.

MUTUAL FUNDS
Stock mutual fund "MDM-World of Stocks"
Growth/Fall: -0.37%
Expectations: growth is possible

Blend mutual fund "MDM-Balanced"
Growth/Fall: -0.49%
Expectations: growth is possible

Bond mutual fund "MDM-World of Bonds" *
Growth/Fall: +0.51%
Expectations: neutral

Stock mutual fund "MDM-World of Funds" **
Growth/Fall: -4.01%
Expectations: growth is possible

* In rating of Smart Money journal for 2007 MDM-World of Bonds is in the highest section - High. Assessment was conducted by three coefficients: beta, alpha and Sharpe. The fund was placed 1st by profitability in 2007 among the bond funds of High rating, alpha coefficient - 1st place, beta coefficient - 3rd place, and Sharpe coefficient - 3rd place.

** Growth/Fall of unit cost for July, 24, 2008-July, 31, 2008; expectations of unit cost for July, 31, 2008-August, 7, 2008.

MARKET STATISTICS