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ATON - Russian Equity Strategy - Stratonomics, July 2013.

After a Good Run, Take Profit in Energy

Our recommendation for investors this month is to take profit in Russian energy names given their absolute and relative outperformance over the past month.

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MSCI Russia is up 7.4% since 26 June, and is one of the better performing emerging markets (MSCI EM added 6.6% over the same period). Not surprisingly, the global environment has been a supportive factor, with the oil price (Brent) up 7.3% over the past month; MSCI World gained 6.4%.

A sector breakdown shows that the oil and gas segment was also a top performer in Russia on a 1M basis, with MSCI Russia Energy up 10.1% and only the telecoms segment faring better (+13.2%). Russian energy names have also outperformed their emerging market peers (MSCI EM Energy is up 8.6% for the same period).

Within the energy segment (defined by MSCI Russia) Gazprom has been the top performer, surging 17.4% in the past month. Given that its 12M fwd P/E stood at 2.4x as the market started to rise, some investors increased their exposure to Russia's gas giant regarding it as too cheap to ignore.

However, given the recent absolute and relative outperformance of Russian oil and gas names, we believe it is now time to reduce exposure to the sector, with one exception. Within the energy space, Novatek has underperformed its peers, and is down 1.3% since 26 June. We advise maintaining and possibly even increasing exposure to this stock. While Gazprom's P/E is still low at 2.8x, it is 15% higher than a month ago. This, coupled with the stock's superior performance on the Russian market over the past month, make it our top profit-taking pick. With respect to reallocation, we continue to sing the same tune: stay away from state-owned entities; stick with good corporate governance names; go defensive and load up on select consumer, telecoms, internet and high-tech companies. Finally, we remain cautious on metals & mining stocks given the potential for a weaker commodity price environment amidst an economic slowdown in China.


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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,
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Publication:Russian Banks and Brokers Reports
Geographic Code:4EXRU
Date:Jul 29, 2013
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