With the past year laying bare the weaknesses of Russian infrastructure, 2010 promises to be a restructuring year for various economic sectors, and companies benefiting from state spending will be the top stock picks.
Oil and natural gas will continue to power the economy, but substantial changes to electricity, telecommunications and other infrastructure-related sectors mean that the stocks of related companies offer good bets, analysts said.
“It is evident that the government has the will to push through reforms in particular areas,” Renaissance Capital equity strategist Tom Mundy said.
Analysts widely believe that the recession has ended for Russia, with the economy entering the new year with slight growth and the main MICEX Index closing at 1357.11 on Friday, a 123 percent increase from the 608.55 close posted on Dec. 26, 2008, the last Friday of last year. The RTS Index closed at 1450.25 on Friday, up 125 percent from Dec. 26 last year.
A special momentum is expected next year in the electricity sector after an accident at the Sayano-Shushenskaya hydroelectric plant killed 75 people in August.
RenCap predicted that the government would regulate electrical transmission and distribution companies so those companies could turn a profit and, as a result, hang on to money to upgrade their systems.
“The Russian government’s resolve to get cash into the power sector following the recent major incident at RusHydro’s largest generation plant [Sayano-Shushenskaya] has been translated into action,” RenCap analysts Derek Weaving and Vladimir Skylar wrote in a recent report.
RenCap’s favorite utilities stocks include OGK-4 and MRSK Holding, which holds regional electricity distribution companies.
In addition to electricity, the government is expected to pour money into three other “embarrassment industries” — transportation, pharmaceuticals and agriculture, said Chris Weafer, chief strategist at UralSib.
Weafer is recommending shares in Sberbank and cellular providers Mobile TeleSystems and VimpelCom because they may benefit as the economy gathers steam. Weafer also favors Comstar and Sistema in anticipation of a 2010 restructuring of the telecom sector. Rounding out his list are power plant operator Inter RAO, electricity transmission company Federal Grid Co. and Moscow electricity producer Mosenergo, which stand to benefit from reforms in the electricity sector.
Asked about stocks to avoid, Weafer said he remained “very wary” of oil producers because of a double whammy of high corporate taxation and inflationary pressures.
Oil and gas companies gave relatively weak performances this year after high taxes cut into their profitability.
Mundy said high oil prices added to the value of nonenergy stocks like banks, but he added: “Clearly, a high oil price benefits Russia Inc. — Russia as a company.”
That is a huge factor given the government’s majority stakes in many of the biggest corporations, including Gazprom, the Federal Grid and Rosneft. Investing in a state company is typically the most profitable route, analysts said.
Some analysts, however, are placing bets on oil producers. LUKoil is one of the “top calls” by RenCap in the oil and gas sector because of what the brokerage terms as the company’s “sustainable” earnings base.
RenCap also has buy recommendations on Gazprom and Tatneft, as well as MRSK Holding and VimpelCom. VimpelCom, said Mundy, has the best exposure among Russian telecoms to retail sales and consumer demand, giving it a head start if consumer demand increases.
The telecom sector was also recommended by the Otkritie brokerage, which said in a recent report that “telecoms remain in general more defensive, profitable, and growing faster than the economy.” Otkritie named MTS and ITE Group its top picks in the sector.
Otkritie is among the brokerages to declare the end of the recession, which began in fall 2008.
“Based upon leading indicators, we think that the recession has come to an end,” Otkritie analysts wrote in the report.
The report predicted that the most pronounced recovery next year would be in sectors that directly suffered from unemployment, salary freezes and salary cuts, such as retail sales. It also named construction, machinery, real estate and transportation as rebounders.
In fact, the economy will have the crisis to thank as it takes strides toward liberalization next year, said Mark Rubinstein, deputy head of research at IFC Metropol.
“In most sectors, we are moving toward that direction,” Rubinstein said. “I think the crisis is basically the one to thank.”