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Equity markets have been mostly range-bound throughout the summer, taking a breather from a dramatic bounce in the first five months of the year.
But with only a few weeks left before stocks head into the traditionally volatile months of September and October, a variety of factors — from faint signals that the economic crisis could be loosening its grip to fears of ruble devaluation in the coming year — could bring a sudden end to the summer’s calm.
After rallying over 75 percent since the start of the year, the MICEX and RTS have both been trading around their 1,000-point marks for a large part of the summer. Their fluctuations have been tied mostly to moves in oil prices, which have themselves been bouncing between $58 per barrel to a year high of $73 per barrel.
The exchanges closed higher last week, as better-than-expected U.S. job numbers drove the MICEX to finish the week up almost 6 percent, while the RTS closed up more than 6 percent.
July’s Purchasing Manager’s Index gave some hope that the worst of the recession may be past, showing the manufacturing industry shrinking at its slowest rate since September. The Industry and Trade Ministry reported that the country’s unemployment rate fell to a six-month low of 8.3 percent in June.
Separately, July data from the State Statistics Service showed wage arrears hitting a five-month low of 7.2 billion rubles ($227 million) in June, an 18 percent fall from May, when arrears rose 10.8 percent.
The mounting positive economic signs could translate into higher stock prices in the short term.
“We could see a bit of a dip in August, but a rally is possible in September amid expectations of the recession finally coming to an end,” said Oleg Dukhin, an analyst at Zerich Capital Management.
Any move to the upside would be best taken advantage of by buying blue chips such as and , he said.
Gazprom shares finished the week up 3.5 percent at 174.06 rubles per share, while Sberbank’s closed up by 2.7 percent at 47.78 rubles per share.
But the economic news has not been all positive. Federal Labor and Employment Service head Yury Gertsy said last month that the number of people registered as unemployed is likely to hit 2.6 million by the end of the year, up from 2.15 million at the end of July.
Various government and banking industry officials have also warned about a possible wave of bad debts coming due in the fall, a development that — according to some of the more pessimistic scenarios — set the stage for a second wave of the crisis.
A correction is probably in the cards for equity markets, though it is unlikely to be a protracted one, said Sergei Perminov, chief strategist at Rye, Man and Gor.
“The market might experience a correction, as technical indicators suggest that U.S. stocks might have already hit their peaks,” Perminov said. “But there’s evidence that the market is far from being short of cash, so we are expecting a short-term correction rather than the widely discussed drastic fall.”
A possible second round of ruble devaluations is the reason for bearishness next year, Perminov said. For now, he recommended investing in blue chips and small cap stocks while staying away from mid-cap companies.
“Second-tier names like Vozrozhdeniye, and have generally outperformed blue chips in the last two months and look expensive,” he said.
Oil companies’ shares are ideal for investors with a middle-term perspective, Perminov said.
On one hand, “they are defensive stocks that will benefit from a weaker ruble. But oil is also a lagging asset and is likely to outperform in the latest stages of any global rally,” he said.
The price of oil will remain an important factor in determining stock movements, analysts said.
The current price of oil is in some ways ideal for the country’s economy, supporting domestic firms while not giving superprofits to highly taxed exporters, said ’s Andrei Kuznetsov.
With the country’s 2010 budget running at a 7.5 percent deficit, Kuznetsov recommends investing in retailers, as the government plans on supporting the low-income clusters of society.
“I would suggest investing in X5 or other retailers that own large discount shops preferred by low-income customers,” he said.
X5 Retail Group’s London-traded shares closed down 5.5 percent on the week at $16.43.
Bank equities are also a good option, as banks will benefit from the ruble liquidity influx caused by the state’s measures to support the economy, Kuznetsov said.
