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The Bear’s market

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The Bear’s market

Published: August 12 2008 03:00 | Last updated: August 12 2008 03:00

After corporate warfare, real war. For investors, the Georgian conflict compounds what has been an appalling recent Russian news flow. Confidence has been buffeted by the shareholder fight at TNK-BP, which remains unresolved, and even more by prime minister Vladimir Putin’s verbal assault on steelmaker Mechel. The oil and commodity prices that have underpinned the Russian investment story are declining too.

All that has sent the market down by about a third from its previous high. The consolation is that the Russian market has bounced back from plunges of similar magnitude four times in four years. At current levels, Russian stocks are trading at 8.6 times earnings, according to Credit Suisse, a 20 per cent discount to the global emerging markets average of 10.7. It is starting to appear oversold.

Investors will look beyond the conflict itself to other factors. First, does Mr Putin’s high profile in managing the crisis, following his sniping at Mechel, hint at instability in Russia’s dual-headed “tandemocracy”? President Medvedev had, after all, insisted that foreign and security policy were his fiefdoms. At the very least, investors will fear Mr Medvedev is not as strongly placed as they had hoped to deliver the reform programme they had welcomed. Second, how much will the conflict hurt relations with Russia’s dominant partner, the European Union?

Factors supporting previous Russian market bounces – rising oil prices, massive amounts of foreign capital – are lacking. Though a full ceasefire will almost certainly see the beginning of a market bounce, a full recovery will be harder and take longer to achieve. Seasoned emerging market-dedicated funds will come back but new money may decide there are less risky opportunities elsewhere.

New strategic investors may make a similar choice. This could cause a problem. If oil prices continue to fall, Russia will start to rely more on foreign capital to fund its continuing economic revival.

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