Market Watchers Size Up Correction

After a dismal 2008, equity markets soared in the first half of this year only to be pulled back to earth in June.
Now, with six months of the year gone, market watchers are scrambling to find a reason for the correction — and peering into the future to see what the rest of 2009 will bring.
June was a difficult month for the markets. The benchmark MICEX Index dropped 13.5 percent after nearly doubling from the beginning of the year to June 1. The dollar-denominated RTS Index followed suit, falling 9.2 percent for the month after a rally of 118 percent for the first five months of the year.
Both indexes closed the week down slightly, with the MICEX ending on Friday at 974.07, down 1.8 percent, and the RTS dropping 0.6 percent to 950.24.
Some analysts described the June drop, which was steep enough to bring the MICEX briefly into bear market territory, as a relatively minor event in light of the run-up that had preceded it.
“The correction … in fact, was not that depressing, coming after a 128 percent rally from the end of February,” said Tom Mundy, an equity strategist at Renaissance Capital.
Oil prices, which climbed from a low of $33.50 at the beginning of the year to as high as $73 per barrel in June, served as the rally’s engine — and its eventual undoing, Mundy said.
While investors’ hopes of a quick recovery in the global economy helped pull oil prices higher, by June “this conviction gave way to weak GDP and industrial production data as well as concerns that the oil price looked stretched, providing investors with the opportunity to take profits,” Mundy said.
He said he expected the RTS to reach 1200 by year-end.
Others, however, contend that Russia’s monetary policy, as well as that of other G8 countries, had as much to do with the rise and fall in share prices as oil did.
“What we saw in the first months of 2009 can be called a “monetary liquidity rally,” said Alexander Osin, chief economist at Finam Management.
Banks, flush with government bailout money, hedged their risks by purchasing commodities, which led to a rally in oil stocks and then the rest of the market, Osin said.
“Eventually, however, this trend was blocked by profitability and inflation risks,” he said. “When oil prices reached $70 per barrel, it jeopardized the economic efficiency factor. At that point, many players left the stock market.”
Osin still believes that there is some cash “waiting in the wings” that could push the MICEX and RTS to 1240 and 1200, respectively, to close the year. However, he doesn’t expect “any significant growth in profitability” that could translate to a rise in stocks.
“On the other hand, I don’t see any collapse, either,” Osin said.
Still others say the rally was an indirect result of the gloomy forecasts and low expectations that abounded at the beginning of the year, a time when most investors were still shellshocked from the beating that markets had taken in 2008.
Troika Dialog’s Andrei Kuznetsov called the phenomenon an “excessive recovery.”
“The rally started when investors realized that the global economy did not fall off a cliff and the risk of a collapse of the global financial system subsided,” Kuznetsov said.
A contributing factor, he said, was the policy of quantitative easing conducted by the U.S. Federal Reserve and other global regulators.
“An inflow of fiat money raised fears of higher inflation, which forced investors to switch from low-yielding, risk-free bonds to riskier and tangible assets like commodities and equity,” he said.
Although rising oil prices helped Russian markets outpace all others, the global economy is still fragile, and demand for commodities is unlikely to recover soon, Kuznetsov said, predicting that the RTS would finish at 1000 by year-end.