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SLEF Market Sentiment Indicator

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Latest topics
» PABC : This must pass 20 rs. level very soon
by soileconomy Today at 9:31 pm

» Today run LOFC 5+
by kjojo Today at 8:25 pm

» Penny TESS 7.4Mn trade volume!
by D.G.Dayaratne Today at 8:25 pm

» Planning to buy some shares - Suggession please
by sanjulanka Today at 7:33 pm

» CFVF run Will start soon
by kjojo Today at 7:16 pm

» Comparison TAFL,BFL & GRAN
by TARGET Today at 7:14 pm

» LLUB - At the Current Price
by kjojo Today at 5:49 pm

» Positive Trends.. Exports up..
by ranferdi Today at 5:03 pm

» LCEM 10/-.......
by kjojo Today at 2:46 pm

» KZOO ... KZOO ...Stock Buy Back underway ?
by Namal Today at 1:32 pm

by Investor1994 Today at 11:17 am

» Save the stock market- and may be they (cse) will bring down the cse & sec levy.
by sheildskye Today at 9:14 am

by Wimal Modawansa Today at 9:09 am

by Wimal Modawansa Today at 9:05 am

» The New Pope: Bergoglio of Argentina
by leasingmandate Yesterday at 5:41 pm

» HEXP Starts Next Run to Rs.300
by kjojo Yesterday at 2:54 pm

» කිංස්බරි හෝටලයේ විදුලි සෝපානය මනාලයා සමග හිරවේ.. මංගල උත්සවය ජංජාලයක් වෙයි.. මනාලයා වන්දි ඉල්ලා නඩු යයි.
by trasantha Yesterday at 8:03 am

» UDPL Next Run soon
by kovida Tue Oct 17, 2017 10:58 pm

» Financial Instrument- Lease BG/SBLC
by leasingmandate Tue Oct 17, 2017 2:39 pm

» HVA.............? wtz gonna happen with HVA?
by anjelo Tue Oct 17, 2017 1:53 pm

» watch CSF
by kjojo Tue Oct 17, 2017 12:21 pm

by The Hunter Tue Oct 17, 2017 10:08 am

» ගංගා මෑණියන්ගේ බැල්ම ලගදිම කොටස් වෙලදපොල දෙසට
by ranferdi Tue Oct 17, 2017 7:57 am

» + Point for Market : IMF reaches staff level agreement on third review of Sri Lanka’s EFF
by Ran49 Tue Oct 17, 2017 7:16 am

» Hotels face tough time --- Drop in tourist arrivals predicted/so many new hotels are opening
by kcrRanz Tue Oct 17, 2017 4:55 am

» Asian shares conquer 10-year peak
by kcrRanz Tue Oct 17, 2017 4:51 am

» Ideas about SCAP.N000 ?
by kcrRanz Tue Oct 17, 2017 4:40 am

» Why CSEC going up....???
by kcrRanz Tue Oct 17, 2017 4:30 am

» why bfl...gran...tafl...not moving
by kcrRanz Tue Oct 17, 2017 3:17 am

» Time to Talk About How Budget 2018 will Help for Us!
by Dailytrader Mon Oct 16, 2017 7:02 pm

by Roshan Fernando Mon Oct 16, 2017 2:11 pm

» LOFC 7+ next week
by kjojo Mon Oct 16, 2017 12:41 pm

by niru Mon Oct 16, 2017 11:43 am

by Namal Mon Oct 16, 2017 10:54 am

» From today - Watch Watch
by Richman Mon Oct 16, 2017 8:44 am

» IS CTBL.N ready to run ?
by Richman Mon Oct 16, 2017 8:43 am

» Sri Lanka tea prices seen remaining high on global shortfall
by Wimal Modawansa Mon Oct 16, 2017 8:10 am

» Recommended buys in planation
by Wimal Modawansa Mon Oct 16, 2017 8:08 am

by worthiness Sun Oct 15, 2017 1:38 pm

» Plantation Sector Summary
by Wimal Modawansa Sun Oct 15, 2017 7:28 am

» BUY CFT with expect to cross share 10+
by sameboy Sat Oct 14, 2017 12:53 pm

by gdid Fri Oct 13, 2017 5:32 pm

» WATA N00000
by gdid Fri Oct 13, 2017 5:29 pm

» MAL N and X
by Captain Fri Oct 13, 2017 12:05 pm

» Watch DFCC and NDB and guess which one is best
by Captain Fri Oct 13, 2017 11:54 am

by kjojo Fri Oct 13, 2017 11:42 am

» 4 new all-time record prices in Lanka Commodity Brokers Catalogue of 11 Oct. auction
by anjelo Fri Oct 13, 2017 8:58 am

» LIOC run Just started
by Ran49 Fri Oct 13, 2017 7:28 am

» LIOC is going to increase oil price
by SIRRA123 Thu Oct 12, 2017 9:06 pm

» See what these UNP criminals has done to our EPF and ETF, We have to burn these fellas
by Ryan Hudson Thu Oct 12, 2017 7:57 pm

by newone Thu Oct 12, 2017 5:41 pm

» Heavy rainng......But still VPEL & HPFL at very low price
by newone Thu Oct 12, 2017 5:35 pm

» TKYO - Capital Trust Recommends BUY
by Maxime Thu Oct 12, 2017 3:17 pm

by Namal Thu Oct 12, 2017 2:26 pm

» DOCK FUTURE hit 120 share
by kjojo Thu Oct 12, 2017 1:58 pm

» keey eye on DOCK
by kjojo Thu Oct 12, 2017 12:37 pm

» look MULL. Today Run
by TuTanKaman Thu Oct 12, 2017 12:25 pm

by DHAVER88 Thu Oct 12, 2017 12:15 pm

» Aitken Spence - Prospects
by MasterD Thu Oct 12, 2017 10:41 am

» NDB Bank PLC
by MasterD Thu Oct 12, 2017 10:38 am

» UBC - Union bank a hidden GEM
by MarketWch Thu Oct 12, 2017 10:36 am

» Correct time to buy DFCC
by Harry82 Thu Oct 12, 2017 9:28 am

by samaritan Thu Oct 12, 2017 9:20 am

» Watch the followings
by Harry82 Thu Oct 12, 2017 9:03 am

» WHERE IS down.......ASI 5700...
by kjojo Thu Oct 12, 2017 9:01 am

» Bank Guarantee/StandBy Letter of Credit(MT760),Project Funding,MT103,Loan.
by kimsungnyon010 Thu Oct 12, 2017 8:17 am

» Bank Guarantee/StandBy Letter of Credit(MT760),Project Funding,MT103,Loan.
by kimsungnyon010 Thu Oct 12, 2017 8:16 am

» Bank Guarantee/StandBy Letter of Credit(MT760),Project Funding,MT103,Loan.
by kimsungnyon010 Thu Oct 12, 2017 8:13 am

» AGST can move
by Richman Thu Oct 12, 2017 7:28 am

» ACAP latest penny
by Richman Thu Oct 12, 2017 7:06 am

» Can the oil price remain as it is?
by predictor Thu Oct 12, 2017 6:52 am

» Market is falling continuously
by Yahapalanaya Thu Oct 12, 2017 5:27 am

by Yahapalanaya Thu Oct 12, 2017 5:20 am

» LDEV Price
by sanjulanka Wed Oct 11, 2017 6:10 pm

» Stock Market Entertainment
by SL.Market Wed Oct 11, 2017 6:05 pm

by kjojo Wed Oct 11, 2017 1:02 pm

» LLMP N0000
by kjojo Wed Oct 11, 2017 12:54 pm

» AINV.N is ready to run ?
by kjojo Wed Oct 11, 2017 10:46 am

» look LOFC- Ready to run
by max shanu Wed Oct 11, 2017 10:03 am

» LOLC towards ...150
by Harry82 Wed Oct 11, 2017 9:37 am

» Is it ok vone
by prasa2004 Wed Oct 11, 2017 8:53 am

by prasa2004 Wed Oct 11, 2017 8:51 am

» How about LDEV
by sanjulanka Tue Oct 10, 2017 11:29 pm

» FC recommends a STRONG BUY on SAMP.N
by Harry82 Tue Oct 10, 2017 4:08 pm

» Watch LDEV..
by Beta1 Tue Oct 10, 2017 2:09 pm

» How About CHOU
by max shanu Tue Oct 10, 2017 11:30 am

by Tissa Tue Oct 10, 2017 10:31 am

» UDPL Lead the Plantation
by Ran49 Tue Oct 10, 2017 7:43 am

» Financial Instrument- Lease BG/SBLC
by leasingmandate Tue Oct 10, 2017 4:32 am

» ready to ACME blast
by gayanath1983 Mon Oct 09, 2017 3:06 pm

» ACME 9+ Coming soon
by rasikagamage Mon Oct 09, 2017 2:31 pm

» World bank confirms bribery involving Maithri –Australian Co. that gave it blacklisted
by samaritan Mon Oct 09, 2017 2:14 pm

» HEXP Start next run to 150
by Miss-Sangeetha Mon Oct 09, 2017 11:56 am

» Top Ten Tomorrow (TTT)
by Wimal Modawansa Mon Oct 09, 2017 10:28 am

» Although there is a huge buying pressure, why not AINV.N move ?
by Eugine Fernando Mon Oct 09, 2017 10:25 am

» Next ALUF Target Price 40
by kcrRanz Mon Oct 09, 2017 10:23 am

» Russiyawata Wada Loki irrisiyawa
by sanjulanka Mon Oct 09, 2017 9:30 am

» This weaek runners...
by Wimal Modawansa Mon Oct 09, 2017 8:24 am

» CFT share එක මොනව හරි දෙයක් වෙනව වාගෙ.
by sameboy Mon Oct 09, 2017 7:11 am

What's Behind the Russian Stock Market Gains?

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What's Behind the Russian Stock Market Gains?

Post by VALUEPICK on Sat Sep 19, 2015 11:56 am

Those promoting good news from Russia are focused on the fact that Russia's equity indices are among the best performing in the world this year. The RTS Index is up 11 percent while MICEX is 18 percent ahead of where it started the year. That compares with a loss of 16 percent for the MSCI Emerging Markets Index (MSCI EM) and a drop of 4.5 percent for the U.S. S&P 500 index.

The bad news is that the main reason the indices have performed relatively well is because valuations were already very low coming into this year as foreign investors, i.e. those who did not need to have Russian exposure, had long since departed. So that combination of relatively few active investors and cheap valuations meant that the indices have basically been drifting with low volumes.

Taken over the past five years, the U.S. dollar-denominated RTS is down 45 percent while ruble-based MICEX is up 22 percent or slightly ahead of the 20 percent rise in China's benchmark Shanghai Composite Index in the same period. The quick conclusion is that, smoothing out the volatility of the past few years, Russian equity indices have largely followed EM peers but with the major difference being the ruble devaluation hit on the dollar priced indices. In other words, the oil price impact.

That five-year period covers the U.S. Fed's quantitative easing program during which there has been steady hemorrhaging of liquidity from the emerging market asset class into U.S. equities. The result has been that the S&P 500 Index was the best major equity index in that period with a 75 percent gain.

There is an obvious contradiction in this year's relatively good market performance with the fact that the economy has slipped into recession. In reality there is no contradiction because equity investors mostly deal with anticipation rather than wait to react to facts. Markets are usually out of sync with economics.

So, taking all of that into account, what should equity investors be doing now or, for those of a more cautious disposition, what should they be watching most closely as an early indicator that a more sustainable rally in Russia's equity indices may be in the offing?

It would be no surprise if, at this stage, a large number of skeptics are thinking that such a notion as buying equity risk in Russia today is ridiculous. History suggests otherwise. The big decision an investor has to make is whether there is a bigger risk of valuations becoming cheaper or of a knee-jerk move higher.

Currently, Russian equities are trading at a discount of 50 percent relative to the MSCI EM average. That discount is less, at 40 percent, when the always discounted oil and gas stocks are excluded. There is a lot of bad news and poor expectations built into the market discount. One would have to be unusually pessimistic to assume that valuation gap gets much bigger.

The issue is that when such a thinly traded and tightly held market, as Russia has now become, jumps it can do so very quickly and certainly more quickly than a majority of investors can react. We saw that in the first half of 2009 when the RTS Index doubled between end January and early June even as the economy slipped further into recession.

That was the anticipation effect as investors reacted to the bottoming of the oil price and started to price in the earnings recovery expected in 2010. It basically means that if investors are less fearful of a further big fall in valuations than they are of losing the first leg of a big rally then they need to be very focused on the few big issues which can lead to that knee-jerk move higher.

So, what are the factors that can have that propulsion effect? I suggest the best way to consider the question is via valuation bands; what events may move the equity market to different levels of risk perception?

The three categories are a) what can eliminate the exceptional risk premium which widened the valuation gap from a more usual 35 percent to 50 percent from late 2013? b) what can return the valuation gap back to the 20-25 percent range it traded at before the 2013 growth slowdown? and c) what are the circumstances which could eliminate the valuation gap entirely?

For the first of those questions only two factors matter; the oil price and when financial sector sanctions may start to be eased. Positive movement in either would produce the first knee-jerk reaction and move the market back to the middle-valuation band while of course a further worsening for either would further depress sentiment, albeit with only limited downside movement because negative scenarios are already largely priced in.

Cutting that down to even earlier indicators means focusing on the supply trend for oil and whether the currently hopeful signs of extending the cease-fire in eastern Ukraine hold and lead to further talks with the aim of delivering a workable longer-term deal. Any sign of a cut in oil supply, especially from the U.S. shale sector, or an agreement to start a new round of peace talks, would be very quickly reflected with a tightening of the valuation gap.

An oil price rally and/or optimism that the financial sector sanctions may start to be withdrawn by the middle of next year would take the equity market out of the “sin-bin” but to restore valuations to the longer-run average will need optimism that earnings can again start to grow. That means there will have to be an assumption that the recession will only last one year and even modest recovery can be delivered next year and in 2017.

Forward momentum in the earnings can further reduce the valuation gap, albeit not without the pre-condition of oil price recovery — or stability at or above the $50 per barrel level — plus a re-opening of international capital markets to Russian borrowers. Hence the trend in the monthly macro indicators will also have to show that the recession did indeed bottom in the 2nd and 3rd quarters.

So, an oil price rally and sanctions easing plus positive macro trend indicators, even if modest, are all capable of getting the valuation gap back to where it started. To make the final leap to the third valuation band, i.e. close to parity with EM peers, will require real solid evidence that this is the crisis which starts to shake the Kremlin's policy complacency and leads to some deliverable changes to the economy and to industrial policy.

The last time the market reached the parity valuation band was in May 2008 when the leadership transition generated a lot of optimism about reforms, etc. That turned out to be not much more than smoke and mirrors and was easily blown away when the oil price collapsed over the following seven months. Next time investors will want to see solid evidence of change if they are to push valuations out of the discount bands.

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