Uralsib - Strategy: Hedges Against Global Headwinds - Aug 16, 2011.
Volatile environment calls for investments in less risky names. The turmoil that has affected Russian equities over the last few weeks has resulted in a significant decline in stock prices. The reasons behind this selloff were mainly external, i.e. oil price fluctuations and fears of a slowdown in global economic growth. Under such a volatile environment, we see names with a low debt load, currency-balanced revenue/cost structure, and exposure to domestic demand as less risky. In the table on the left, we list the companies that we consider as defensive under the current environment.
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WHAT TO EXPECT a[bar]
State of global economy raises concerns. Slow growth in the US and eurozone countries and the growing risk of a liquidity crisis in the European banking system due to mounting debt problems are having a negative affect on financial markets.
Russia will be hit if developed economies decelerate. Deceleration in developed economies would have a knock on affect
on Russia that would result in slower growth, lower inflation, a weaker ruble, and a substantial reduction in budget revenue, which would force the government to cut expenditure, including social spending, health, education, defense, and some of the announced infrastructure projects.
a[bar] AND WHAT TO BUY
Oil & Gas. We recommend companies with strong cash generation and relatively safe market position, i.e. Gazprom, LUKOIL, Alliance Oil Company and oil services operators C.A.T. Oil and Integra.
Utilities. We prefer generation companies to distribution and transmission, favoring E.ON Russia and Enel OGK-5, which showed strong progress implementing their capex programs.
M&M. We favor Severstal, due to its exposure to gold, and NLMK, which has the lowest cash cost of slab and strongest financial position. Gold names Polymetal and Petropavlovsk are bets on the high gold price, while the expected buy-back offer by Polyus Gold will continue to prevent its share price from any significant drop.
Fertilizers. Uralkali is a safer investment than Acron, Dorogobuzh, and other second-tier fertilizer producers, as potash prices, supported by long-term contracts, are not as volatile as nitrogen.
TMT. A secure cash flow and low debt makes MTS our top pick among telcos. CTC Media, with its net cash position and reasonable business model, should continue growing even in a downturn.
FMCG. We prefer food retailers for demand defensiveness and their cash flow hedge. Magnit is better positioned to withstand a worsening market situation.
Banks. Among Russian banking names, we favor shares in Sberbank, as the most defensive stock in the Russian banking universe.
URALSIB Capital, 8, Efremova St, Moscow, Russia,119048,
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|Publication:||Russian Banks and Brokers Reports|
|Date:||Aug 16, 2011|
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