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Several distinctive periods can be highlighted in the market movement. In the period between January February the market grew from 1190.34 1516.Section Monetary and budgetary spheres points under the RTS index, which was followed by a short term correction in the mid March, when the RTS index rolled back to reach 135126 points. As illustrated in Fig. 15, despite the short period of correction, the movement of the RTS index was accompanied by rather high trading volume during that period. The next period was accompanied by a steady growth of RTX index growth, which reached its historical peak on May 6 (1765.35 points). Herewith, before early May, the market was grow ing at the background of higher trading volumes than in the second half year, when the market was recovering from deep correction. Thus, in the period between January May the average monthly turnover in the classic stock market in the RTS amounted to nearly USD 1469.5 bln, while throughout the rest of the year it re mained at the level of USD 875 bln. That period was followed by a deep correction, continued till mid June and accompanied by downgrading of RTS index to the minimum level in the year (1234.82 points).

Source : the RTS Stock Exchange.

Fig. 15. The RTS Stock Exchange and Trading Volume in Then, the rest of the year of 2006 can be split in two sub periods. The first one includes the market recovery up to the level of 1650 points of RTS index, followed by a decrease and then by further growth till the end of the year, when RTS index has again reached its historical peak of the level of May 2006 (1853.24 points).

Making an analysis of monthly dynamics of the Russian stock market, one should note that despite long vacations in January, the investors activity in the stock market was rather high, which allowed the basic stock indicators to reach his torical peak values. Sberbank of Russia, LUKOIL, and RAO UES of Russia with their RUSSIAN ECONOMY IN trends and outlooks prominent stock indices were in high demand. An extremely important event for the Russian stock market in terms of its liquidity, attractiveness to investors and further growth prospects became Gazprom open trades of its shares in MISEX, which be came the leaders in trade volume since the first days of trades without any restric tions. External macroeconomic factors were also favorable: US index ratings, world oil prices and ADR prices for Russian bonds were growing by steady high rates.

In February the impact of those factors, accompanied by increased liquidity in the bank sector, contributed to high rates of Russian securities prices growth. A significant effect on the market dynamics in general was provided by the RAO UES of Russian shares, the upward movement of which took place due to positive news on reforms in energy sector. Thus, in his comments on the reform, the President of Russia has supported the idea to attract investments in the sector, both, domestic and external ones. Rostelecom shares have also demonstrated an expressed growth upon M. Fradkovs signature of Regulations on utilization of the RF consoli dated telecommunication network resources to support the functioning of special nets as a necessary provision for privatization of Svyazinvest. Among external con ditions, further growth of oil prices should be highlighted as a primary factor.

The first correction in the stock market happened in early March. Reduction of oil prices in the international market, strengthened expectations of interest rates in USA, as well as a number of technical factors (relative overestimation of some Rus sian companies) provoked a decline in the domestic stock market. However, the period of decline did not last long and from the middle of the month the quotations started to move upwards under the impact of positive news in the RF (LUKOIL statement on acquisition of a part of its own shares, a discussion, held in Moscow by Big Eight country members on the issues of global telecom safety, a notifica tion on a tentative date for Rosneft IPO), as well as external market news (expan sion of basic stock markets).

Steady market growth was continued in April, when the market has reached its historical peak. An outstanding impact on the stock the market was provided by Gazprom, which has made an application to the US Committee on Securities to get a registration in ADR program of the first level, as well as Nordnickel shares, which positive dynamics was supported by analytics recommendations, based on the upward trend of nickel prices in the international market. Moreover, Gazprom got an upgraded rating in MSCI index, which is used by a lot of prominent foreign mar ket participants as a reference point for formation of their portfolios in developing markets. The stock market was also extremely sensitive to external macroeco nomic factors. Thus, in the tensed situation, created by Iran nuclear program, the world oil prices have come up close to the level of USD 70 per barrel, and the Rus sian Urals brand to USD 65 per barrel. In that background, the markets of highly industrialized countries demonstrated variable dynamics, contributing to minimiza tion of unfavorable factors effect in the domestic market.

After May 6, when RTS index has reached its peak of 1765.35 points through out the period under review, the upward trend has been replaced with a decline, followed by a large scale correction. Within nine trading sessions RTS index has got down from the maximum peak level of 1318.5 points, what makes about 33.Section Monetary and budgetary spheres per cent in relative terms. Basically it was caused by the outflow of assets of exter nal investors from all emerging markets, including Russia, due to upgrading of the US interest rate up to 5 per cent per annum and statements on the prospect of tightening of FRS policy. Moreover, the growth of quotations of the majority of Rus sian securities, observed for quite a long period, could not last forever. The decline in the world oil market (black gold price in New York has decreased from USD to USD 70 per barrel) and non ferrous metals can be also considered as the grounds for vast scale sales of shares. By late May prices have won back some of the downfall in the background of improved situation in the world markets and in formation on prospective merging of Severstal and Arcelor companies.

Further market dynamics was characterized by high volatility. While in the first half of June correction was continued and the market moved close to the minimum level during the year, in the second part of June quotations started to move up wards again. The downfall of early June was caused by rather high interest rate risks, coming from USA, due to which the net capital outflow from emerging mar kets within mid May to mid June accounted to USD 13.4 bln, or 5.1 per cent of total amount. Recovery of the market at the end of the month was based on extremely high oil prices, raised to the level of USD 74 per barrel and favorable macroeco nomic indicators of the RF.

In July there were no expressed dynamics in the stock market. Quotations of the most liquid securities were variable, but throughout July some growth was ob served. Lower market volatility was caused by reduced negative expectations of in vestors in regard to further US FRS policy, based on the published report, inform ing on completion of the period of increased interest rates, expected shortly due to some slow down of economic growth in USA in the background of stable prices. In line with that, some strengthening of geopolitical factor was observed in the world stock market dynamics: expanding military conflict in Middle East discouraged the growth of quotations of industrial countries. On the other hand, that factor has boosted up oil prices, bringing them up to the historical peak again, which is tradi tionally favorable to the Russian market. Among the significant internal factors there should be highlighted Fitchs upgrading of the Russias sovereign rating and IPO of Rosneft, which became the largest primary placement among the Russian companies, and the gains accounted to USD 10.4 bln. It should be noted that the company was the first in Russia to give an access to its shares for the population.

In August trading activity in the Russian stock market was restored after the summer stagnation. However, the greatest demand was focused on blue chips of (Gazpom and Sberbank of Russia). In one of scheduled meetings of FRS the inter est rate was maintained at the level of 5.25 per cent per annum, which has posi tively effected both, the US and RF stock markets. Nevertheless, a noticeable downgrading of world oil prices started in August and continued in September (Brent price has declined from USD 75 to USD 60 per barrel, Urals from USD to USD 55 per barrel), which negatively effected quotations of oil companies. In September the market was supported by positive dynamics in US and other stock markets and a number of positive corporate news on electric power industry re RUSSIAN ECONOMY IN trends and outlooks form, upgrading of several Russian companies international ratings, including telecom companies. As a result, in late September the market decline has stopped and gradual growth of prices has begun.

On the one hand, declined oil prices were still providing some pressure on the prices. On the other hand, in the background of a number of positive factors, such as stable interest rate in USA and its expected decrease, upgrading of the world stock indices, the market became more resistant to the oil factor than it was in August September. Among domestic factors, that made an impact on the market, there should be noted IPO of some Russian companies (TMK, OGK 5), where the demand for securities was much higher than the offer, demonstrating a high attrac tiveness of Russian companies to the investors.

In November the growth was continued and its rates have increased. Due to that fact, RTS index has again reached historical maximum of 1853.24 on Decem ber 15 (same level as in May). The grounds for such expressed growth were pre pared by improved situation in the international oil market, where the black gold prices has growth again to the level of USD 63 65 per barrel in view of OPEC deci sion to reduce oil extraction volume and increased demand for fuel in cold season in USA. Securities of telecommunication and electric power companies were in high demand of the investors due to positive results of discussions of energy sector reform in Presidents Administration.

December of preceding year was not an exception; there was a traditional pre New Year rally in the stock market. Bonds were growing due to improved situation in the oil market, in the international stock markets, as well as positive news background. Herewith, securities of companies that do not belong to primary commodity market were in high demand among investors: Sberbank of Russia, RAO UES of Russia, Rostelecom.

In 2006, like a year before, most liquid Russian shares grew significantly in value (Fig. 16). Last year, for example, returns on investments in OAO Rostelecom were most favorable, with the yield being 223.47 per cent (as opposed to 28.18 per cent in 2005).. Such high growth rates were caused mainly by expectations of in vestors for Svyazinvest prospective privatization. Some lower profitability was demonstrated by shares of OAO Sberbank of Russia, which gained 165.38 per cent (against 156.92 per cent in 2005). Next to OAO Sberbank were shares of GMK Norilsk Nickel, which gained in value 161.7 per cent (versus 12.36 per cent in 2005). Rather high returns on investments were demonstrated by RAO UES of Rus sia, which gained 154.72 per cent (against 53.07 per cent in 2005). As concerns other leading companies, their shares gained less: OAO LUKOIL 47.82 per cent (100.34 per cent in 2005), Surgutneftegaz 40.37 per cent (49.23 per cent in 2005), Tatneft 40.06 per cent (127.87 per cent in 2005), Mosenergo 36.43 per cent (4.76per cent in 2005), Gazprom 36.26 per cent and Rosneft 23.98 per cent. The lowest growth rates among the blue chips were noted on shares of Gazprom Neft (former Sibneft), the value of which has grown in 2006 only by 16.per cent.

Section Monetary and budgetary spheres 225.0% 200.0% 175.0% 150.0% 125.0% 100.0% 75.0% 50.0% 25.0% 0.0% Change in price (%) Data source : the RTS Stock Exchange.

Fig. 16. Blue Chips Price Dynamics in In 2006, among the second echelon companies whose shares gained maximum values, were OAO Chelyabinsk (447.95 per cent), TKZ Krasny Ko telschik (439.1 per cent), Pskovenergo (423.53 per cent) respectively. How ever, trading activity of the above listed companies remained low. For example, transactions were made on the shares of OAO Chelyabinsk, 26 transactions on the shares of TKZ Krasny Kotelschik, and 34 transactions on the shares of Pskovenergo RAO Gazprom was the leader by trading turnover to account for 39.8 per cent of the total trading volume in the RTS in 2006. Apparently, such an upswing can be explained by open trading of Gazprom shares. The leader is followed by RAO UES of Russia, accounting for 16.7 per cent against 25.86 per cent in 2005. The next company is OAO LUKOIL, to account for 13.9 per cent (29.55 per cent in 2005). The shares of Norilsk Nickel and Sberbank were ranked accordingly as number three and four to account for 5.9 per cent (9.7 per cent in 2005) and 4.8 per cent (5.6 per cent in 2005) of the total trading volume in the RTS in 2006. Hence, in 2006, trans actions on the shares of the five abovementioned issuers accounted to nearly 80.per cent of the total trading volume in the RTS, which significantly exceeded the relevant indicator of 2005 (71.28 per cent).

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