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ATON - Aton Equity Guide-- Learning to Live with the Bear - Dec 14, 2012.

ATON 2013 EQUITY GUIDE

Learning to Live with the Bear

Russian markets continue to be guided by global events and oil price movements, resulting in MSCI Russia swinging

between +28% YtD (16 Mar) and -11% YtD (1 June) in 2012. On 11 Dec, Russia was up 7% YtD (in dollar terms) and was thus one of the worst-performing emerging markets globally.

(To view the original document, please click on the link below:

http://reports.aiidatapro.com/brokers/AtonEN/141201ATON_2013EQUITY-GUIDE.pdf)

Our economist expects GDP growth to slow to 3.0% in 2013 from 3.6% in 2012. Meanwhile, we are cautious on the

prospects of the reform agenda, feeling that 2013 may come too early to see tangible economic results from the state's plans. Politically speaking, President Vladimir Putin's popularity in the regions remains fairly well entrenched, somewhat undermining expectations of an imminent political crisis. However, all else equal we anticipate weakness in the oil price next year and warn that historically a YoY decline in crude has negatively impacted Russian economic growth and equities. Given this outlook, we do not anticipate any acceleration in wage growth in the medium term, suggesting that authorities will find it challenging to meet the electorate's expectations.

Hints of hope, yet challenges likely to dominate in 2013. Positively, markets now appear less concerned about the EU debt crisis, while growth across EM may accelerate in 2013 thanks to the easing measures implemented this year. The US economy seems to have turned the corner, barring risks from the afiscal cliff'. However, Russia is trapped between

two major ablack boxes': the slowdown in China (a potential drag on commodities) and violence in the Middle East (a

potential driver for oil prices, which nevertheless would likely be negative for equities). We therefore believe that risk-on/risk-off changes will continue to dictate Russian markets, so we revisit our momentum trade ideas for the overall market and individual stocks.

Given Aton's sector analysts' pessimistic or neutral stances on a number of major companies from the energy, materials and financials sectors, our stock picks are based on dividend stories, companies with high corporate governance standards, and our colleagues' highest conviction calls.

Dividends: If the government accomplishes its goal of extracting juicier dividends from state-owned companies starting in 2013, this should help to reduce Russia's valuation discount to EM peers. However, any contraction may be limited by concerns over how falling commodity prices might disrupt dividend payments. That said, Russia currently offers one of the highest dividend yields in the EM space. Here we recommend Bashneft prefs, Surgut prefs, Sberbank prefs, MTS, and M.Video.

High corporate governance standards: We believe that the growing emphasis on decent corporate governance and ample liquidity has shrunk Russia's ainvestible' universe, in turn pushing valuations for certain stocks to uncomfortable

highs. Nonetheless, we expect companies with well-perceived governance standards to remain in vogue and so identify our preferred names based on earnings growth and valuations. We favour NOVATEK, Yandex, Magnit, Globaltrans and LSR Group.

High conviction calls: Aton's sector analysts have identified their favourite stocks and the names they strongly believe

should be avoided. From the full list (see page 31), we note that NOVATEK and M.Video are also among the top picks

in the two previous themes.

2013 INVESTMENT STRATEGY

INVESTMENT SUMMARY

This has been a challenging year for Russian equity markets, which continued to be steered by global events and oil price movements. On 11 Dec, MSCI Russia was up 7% YtD (in dollar terms), making it one of the worst-performing emerging markets globally. At the same time, intra-year Russia was up 28% YtD on 16 Mar and down 11% on 1 June,

highlighting ongoing market volatility.

On the domestic front, our economist expects GDP growth to slow to 3.0% in 2013 from 3.6% in 2012. Meanwhile, we are cautious on the prospects for the reform agenda, feeling that 2013 may come too early to see tangible economic results from the government's plans. Politically speaking, President Vladimir Putin's popularity in the regions remains fairly well entrenched, somewhat undermining fears of an imminent political crisis. However, all else remaining equal we anticipate weakness in the oil price next year and caution that historically a YoY decline in crude has negatively impacted Russian economic growth and equities. As a result of our outlook on crude prices, we do not anticipate an acceleration in wage growth in the medium term (we argue that spectacular income growth laid the foundation for Putin's support), suggesting challenges for the authorities in managing the electorate's expectations.

The global backdrop is likely to remain difficult in 2013. On the positive side, the markets now appear less concerned

about the EU debt crisis. Sovereign bond purchases by the ECB remain a potential trigger, while growth across EM may accelerate in 2013 thanks to the easing measures implemented this year. Furthermore, the US economy seems to have turned the corner, notwithstanding risks from the afiscal cliff'. Meanwhile, Russia is trapped between two major ablack boxes': a slowdown in Chinese economic growth (a potential drag on commodities) and violence in the Middle East (a potential driver for oil prices, which nevertheless would likely be negative for stock markets).

Moreover, excess volatility in Russian and European equity markets relative to the S&P 500 remains elevated, perhaps

underscoring investor caution. It is therefore likely that the markets in 2013, as in 2012, will be characterised by risk-on/risk-off sentiment changes. Hence we have revisited our momentum trade ideas to identify frequent outperformers and underperformers in both market rallies and downturns.

Stock picks based on a thematic approach. Given that we are again unable to make a strong call on Russia, we have

selected our top picks based on two themes. In addition, our sector analysts have identified, if applicable, their strongest conviction ideas as well as the key stocks to avoid. Figure 1 summarises our top picks.

1. Dividends. We believe that 2013 may become a turning point for Russian dividends as the government heats up its

efforts to extract juicier payouts from state-owned companies. If accomplished, this should help reduce Russia's

valuation discount to EM peers. However, any contraction here may be limited by concerns over how falling commodity prices could disrupt dividend payments. In the meantime, Russia still offers one of the highest dividend yields in the EM space. We present the stocks with the best forecasted dividend yields, separately highlighting those with higher liquidity or from non-commodity sectors.

2. Corporate governance/high quality stocks. We believe that the growing emphasis in recent years on high corporate governance standards and decent liquidity has shrunk the ainvestible' universe for many investors, in turn pushing the valuations of certain stocks to uncomfortable highs. Nonetheless, we expect companies with wellperceived corporate governance standards to remain in vogue and so identify our preferred names based on earnings growth and valuations, both among the Russian group and relative to EM peers.

3. Analysts' conviction calls. Aton's sector analysts have identified their favourite stocks and the names they strongly believe should be avoided. Where there are no names listed, the analysts are either in the process of revising their views or they currently see no strong cases in their sectors.

More: http://reports.aiidatapro.com/brokers/AtonEN/141201ATON_2013EQUITY-GUIDE.pdf

****

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For further Information please contact: Aton OOO (LLC),

27 Pokrovka str., bld.6, 105062 Moscow, Russia

phone: (495) 777-66-77, (495) 228-38-99

aton-line@aton-line.ru, http://www.aton.ru
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Publication:Russian Banks and Brokers Reports
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Date:Dec 15, 2012
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