Goldman Sees Russia ‘Correction’ as Stock Funds Exit

Russian stocks risk a “temporary correction” as commodity prices fall on concern China will increase interest rates, Goldman Sachs Group Inc. said.

“We see this as no more than a temporary correction, yet we would recommend tactically to diversify with a more defensive exposure,” strategists led by Moscow-based Sergei Arsenyev wrote in a research report. Russia is unlikely to outperform in the “very short term,” he wrote.

Russia’s Micex Index has retreated 5.5 percent from its 2010 high on Jan. 19 as crude oil prices sank 6.4 percent. Investors are concerned that interest-rate increases by China will restrain a recovery in the world’s fastest-expanding major economy that helped spur a surge in global equities since March including in Russia, the world’s largest energy exporter.

Russian equity funds posted their first net outflows in 12 weeks as investors withdrew $608.5 million from emerging markets on concern the global recovery will slow, research company EPFR Global said. Net outflows from Russia were $87 million for the week ended Jan. 27.

“We believe the outflow of cash from Russian assets might lead to additional pressure on the market and exacerbate the downward correction,” Mark Robinson, head of equity research at UniCredit SpA in London, said in a report dated today.

The Micex advanced 0.2 percent, reversing an earlier decline, to 1,408.10 at 4:39 p.m. in Moscow. The Micex level is equivalent to 8.7 times analysts’ 2010 earnings estimates for its traded companies, the lowest among major equity markets in developing countries, according to data compiled by Bloomberg.

‘Cheap’ Valuations

Russia is still the most attractive emerging market in the “medium term” given “cheap” valuations and the potential for the central bank to lower borrowing costs over the next 12 months, Goldman’s Arsenyev wrote.

OAO Rosneft, Russia’s largest oil company, was added to Goldman’s “focus sell” list for central and east Europe, the Middle East and Africa, according to the report dated yesterday, which cited the potential elimination of tax breaks in eastern Siberia. Rosneft shares fell as much as 1.9 percent and last traded 0.9 percent lower.

Telkom South Africa Ltd. was included in the “focus buy” list to boost holdings of so-called defensive companies with less reliance on economic growth.

“We are concerned about short-term headwinds for emerging markets,” Arsenyev wrote. “Our key concern is potential China tightening and its negative impact on short-term commodities prices.”

(Bloomberg, January 29, 2010)