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Alexey Golubovich CIO, Chief Strategist, Managing Direcor
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Arbat Capital Chases Global Stocks, Russia Index no Bargain

The low valuation of Russia’s biggest equities index is illusory and global stocks offer a better investment, said Alexei Golubovich, the managing director of Arbat Capital, which has $500 million under management. “Our main call for the next six months is global equities outside of Russia,” Golubovich said in an interview in Moscow. Natural resources companies, semiconductor producers and certain U.S retailers, including JC Penney Co. (JCP) and Best Buy Co. (BBY), are his favorite picks. 

The low price to estimated earnings ratio of Russia’s Micex Index is skewed by the weighting of big stocks with low valuations, such as OAO Gazprom, the natural-gas export monopoly, and OAO Lukoil (LKOH), the country’s second-biggest oil producer, Golubovich said. Russia’s benchmark Micex Index (INDEXCF) trades at about 5.8 times estimated earnings, while the MSCI Emerging Markets Index (MXEF) has a multiple of 10.7.

Moscow-based Arbat invests about 20 percent of its funds in Russian equities and bonds. While Gazprom trades at three times estimated earnings and Lukoil at 4.7 times, Rosneft, Russia’s biggest oil producer, and Sberbank, the country’s largest lender, have multiples of 7.7 and 6.5, respectively, data compiled by Bloomberg show. “Sberbank at $14 and Rosneft at $9 are expensive stocks for us,” said Golubovich, referring to prices of the companies’ depositary receipts. Sberbank traded down 0.3 percent at 106.68 rubles as of 2:32 p.m. in Moscow, 5.59 rubles short of a record high. Rosneft trades at $9.05 per global depositary receipt, $1.50 above its 2006 initial public offering price. 

“Special Situations”
Golubovich buys only Russian stocks with high dividend yields or “special situations” equities, such as the Moscow- traded shares of OAO Mobile TeleSystems (MBT) and OAO TNK-BP Holding (TNBP)’s ordinary stock, he said. MTS has an estimated dividend yield of 5.4 percent this year, compared with 3.8 percent projected for the Micex Index, data compiled by Bloomberg show. At the same time, Golubovich said he’s positioning for changes that may allow Russia-traded shares to be freely converted into depositary receipts. He’s bought the Moscow shares of retailer OAO Magnit, while betting the price of their London-traded stock will fall, a so-called short trade, he said. Magnit’s shares in Moscow closed yesterday at 5,644 rubles ($187.33). Its depositary receipts in London, representing 0.2 of a share, cost $45.46, giving a discount of about 20 percent for the Moscow-traded stock. 

Narrow Spread 
Golubovich, who worked as director for strategic planning at Yukos Oil Co. in 1998 to 2000, said the end of a rally in the country’s Eurobonds has also driven him to non-Russian assets. “The spread of Russian Eurobonds to U.S. Treasuries is very narrow,” said Golubovich. “We don’t expect the Treasuries to rally either.” The yield premium of Russian government dollar Eurobonds due in 2022 compared with U.S. Treasuries of similar maturity fell to 92 basis points yesterday from 148 basis points on Nov. 16. Benchmark U.S. 10-year Treasury rates advanced yesterday to 2 percent for the first time since April as Federal Reserve policy makers begin a two-day meeting today. 

29 January 2013, Bloomberg

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