Rarely has the market for Russian securities
been more competitive. Here are the
researchers investors say provide the best
guidance. BY BEN MATTLIN
In recent years Russian
stocks have been among hottest instruments in the financial world. Now it is the country's stock analysts who are coveted.
In the past year Deutsche Bank, Troika Dialog and UBS
all lost their research directors to poaching by domestic rivals or overseas banks and fund managers. Many other analysts
jumped to new employers as banks ramped up their efforts to meet the growing demands of domestic and international investors
for investment ideas. This all amounts to the most competitive market for securities research that Russia has experienced
“We’re seeing significant growth in demand
for high-quality analytical talent,” says Alexander Burgansky, Renaissance Capital’s head of equity research.
He should know. The firm has been expanding aggressively, adding eight research analysts in the past year, for a total of
48; the team tracks 216 stocks. Renaissance has more analysts, who follow more companies, than any other firm covering Russian
The firm’s commitment to research is appreciated
by investors. For a fourth year in a row, Renaissance leads Institutional Investor’s All-Russia Research Team for the
breadth and quality of its investment advice, as voted by fund managers. But the firm’s margin over its rivals has narrowed
Renaissance claims 11 total team positions, three fewer
than last year. Aton Capital Group wins ten total positions, compared with only three last year, and skyrockets to the No.
2 spot from sixth place. Rounding out the top five are Deutsche, Troika and UBS, respectively. The rankings are based on the
responses of more than 230 buy-side investors at nearly 200 institutions worldwide managing an estimated $55 billion in Russian
The expanding interest in Russian equities among a
broader range of investors is fueling the growth of research, bankers say. "We're seeing an increase in both the types and
number of clients that analysts need to speak to, which now range from Russia-specific international investors to emerging-markets
specialists to hedge funds and private equity shops, among others," says Burgansky.
At the same time, Russia’s
equity market is deepening, increasing investor demand for analysts with detailed knowledge of a wider range of companies.
The Russian Trading System index may have cooled—being off 5.0 percent year to date through mid-May after having soared
70.7 percent last year—but equity issuance has soared. New equity offerings, both IPOs and follow-ons, amounted to $20
billion this year through mid-May, compared with $18 billion for all of 2006 and just $4 billion in 2005.
"You can no longer say 'I am
buying Russia' and just buy the index," says Steven Dashevsky, research director at Aton. "You have to be selective now."
Aton was bought by Italy's UniCredit
Group last December for $424 million and has been hiring analysts and expanding coverage ever since. "We've been adding to
sectors with the biggest increases in market cap and number of issuers," says Dashevsky, who also leads the firm’s Oil
& Gas coverage and is ranked No. 1 in the sector, up from No. 3 last year. Aton has 12 senior analysts, three more
than last year, who track 115 companies, up from 90.
Though its ranking holds steady at No. 3, Deutsche
has suffered from defections even as it has sought to build its coverage. Longtime research co-director Stephen O’Sullivan
left the firm in March for Australia’s Macquarie Bank, where he will oversee Asian equity research from Hong Kong. That
same month last year’s third-team Utilities analyst, Derek Weaving, joined Renaissance. Christopher Granville, last
year’s third-teamer in Equity Strategy, left in May 2006 to start his own emerging-markets research firm, Trusted Resources.
Alexei Yakovitsky, now Deutsche’s solo research
head and a returning second-teamer in Telecommunications, says the firm has been filling the vacancies with junior analysts—especially
in the utilities sector—to increase its coverage to 95 stocks from 75 stocks last year.
Troika suffers a tumble after losing key personnel.
The firm, which drops from second place to fourth, lost research director (and last year’s No. 2-ranked Utilities analyst)
Lauri Sillantaka, who joined Stockholm-based EOS Russia, a fund focusing on Russia’s electric utilities subsector. Evgeny
Gavrilenkov, who is on the second team this year in Economics, is acting as temporary research director through this month.
Even with the turmoil at the top, Troika has been adding analysts faster than it has been losing them, resulting in a net
gain of eight equity researchers over the past year, bringing its total head count to 30.
UBS, which falls from fourth place to fifth, lost the
head of its Russian operations, Edward Kaufman, who jumped to rival Alfa Bank as chief executive of investment banking in
February. The Swiss bank also lost its co-head of
Russian equity research,
Vladimir Postolovsky, to a hedge fund in April. Alasdair Breach, co-head of Russian equity research and this year’s
No. 2-ranked equity strategist, is leaving the firm later this year, but he declines to reveal where he is going. “We’re
using junior analysts more to give senior analysts the time to cover more companies,” explains Breach, noting that UBS
covers more than 80 Russian companies, up from 60 one year ago.
The spate of equity issuance, including jumbo offerings
early this year from Sberbank and VTB Bank, is good news for Russia’s financial sector, according to David Nangle of
Renaissance Capital, who advances from runner-up last year to become the top-ranked analyst covering Financial Services. “We
now have two of the largest listed emerging-markets bank stocks in Sberbank and VTB,” he says. The analyst is advising
investors to look at second-tier players such as Vozrozhdenie Bank, a Moscow-based commercial bank with a more investor-friendly
price than Sberbank’s $2,000 a share. “We initiated coverage in September with a buy recommendation when the stock
traded below $30 a share,” Nangle says. “It is now about $60 a share, and we’ve put a lot of investors into
it. This is an exciting time.”
That sentiment is echoed by Renaissance’s Robert
Edwards, who is ranked No. 1 in Metals & Mining for a fourth year in a row. “We have seen Russian domestic stories
graduate into the big league of a global fund audience,” he says. Edwards alerted investors to an opportunity with pipe-maker
TMK last December, on rising demand. By mid-May the stock had risen 13.8 percent.
Economic growth is continuing despite the fact that
oil revenues, which had been fueling much of Russia’s ongoing economic expansion, have been falling because of rising
exploration and production costs as well as declining demand in the U.S. and China. As of mid-May the RTS oil and gas index
was down 24.4 percent from its peak one year earlier, but the downturn has not cramped Russia’s gross domestic product
expansion. Real GDP rose 6.7 percent last year, according to government figures, and an annualized 7.9 percent in the first
quarter of this year. “We will continue to see very strong consumer-driven economic growth,” insists Aton’s
Dashevsky, “as opposed to simply oil-driven growth.”
Renaissance’s Nangle concurs: “Russia,
traditionally a market dominated by oil and gas stocks, is now a much broader market space.”
Vladimir Pantyushin, Renaissance
SECOND TEAM: Evgeny Gavrilenkov, Troika
THIRD TEAM: Yaroslav
from second place, Renaissance Capital’s Vladimir Pantyushin, 37, makes
“accurate forecasts” and “intelligent argu ments,” say clients. Building on an April 2006 analysis
of the govern ment’s moneytightening efforts by colleague Alexei Moisseev (first team, FixedIncome Strategy), Pantyushin
reasoned that domes tic retailers would benefit from the strengthening ruble. He was right. Through mid-May 2007 the retail
sector gained 40.9 percent, while the broad market advanced 25.9 percent. Pantyushin earned a mas ter’s degree at Yale
University and a Ph.D. from Duke University, both in economics, and served as research director at Rosbank before joining
Renaissance in 2005. Slipping one rung to No. 2, Troika Dialog’s Evgeny Gavrilenkov
is lauded for what one customer lauded for what one customer calls his “fine macroeconomic pedigree.” Last October
he recommended financial stocks over oil and gas stocks, believing that government efforts to strengthen the ruble and slow
inflation would encourage borrowing. By mid-May shares of Sberbank, Russia’s biggest lender, had catapulted 78.5 percent.
A “balanced approach” helps Yaroslav Lissovolik climb from runner-up
to the third team. Last August the Deutsche Bank economist forecast that government investment in infrastructure would attract
a greater inflow of foreign investment. In the fourth quarter of 2006, foreign fund inflows skyrocketed a whopping 239.75
percent from a year earlier, to a record $5.7 billion, according to the Investment Company Institute, a Washington-based research
Roland Nash, Renaissance
SECOND TEAM: Alasdair
THIRD TEAM: Christopher
Roland Nash of Renaissance Capital finishes on the
first team for a fourth year in a row. Nash, 34, garners accolades for a report last September that said improving exchange rates would especially benefit companies with strong domestic revenue streams, such as VimpelCommunications, then trading at $220. By mid-May the mobile telephone operator’s
shares had advanced a stunning 104.5 percent, outper- forming the sector by 48.2 percentage points. “Roland’s
clear, easy-to-digest reports are read by everyone,” declares one money manager, “and he only publishes
when he has something impor- tant to say, which is refreshing in these days of data overload.” For being
what one client calls the “most independent and level- headed” analyst, Alasdair Breach of UBS lands in second
for a third consecutive year. Last November
he named Sberbank a top pick, at $2,490, on a likely surge in mortgage and construc- tion lending. The big, state-run banking
concern’s stock vaulted 52.0 percent, to $3,785, by mid- May. Christopher Weafer rises from runner-up to third. The Alfa Bank analyst wowed backers with a valuation-based model portfolio that overweighted stocks such as Sberbank and VimpelCom but underweighted oil companies. The portfolio returned 96.0
percent last year, outstripping the RTS index by 25.3 percentage points. “He understands what we need,” observes one investor.
Pavel Mamai, Renaissance
SECOND TEAM: Alexey
THIRD TEAM: Alexey Demkin, Trust IB
strength is his experience,”declares declares a fan of Pavel Mamai, 35,
who finishes first in this new category. The Renaissance Capital analyst, who
was on the second team in both fixed-income categories last year, "interprets events and makes forecasts like a seasoned pro.”
Last November Mamai recommended the new three-year ruble notes of Federal Grid Co. of United Energy System, an energy supplier,
in anticipation of a likely Standard & Poor’s rating upgrade. His expectation was correct, and the bond jumped 95
basis points by late April before giving back 20 basis points through mid-May. Over the same period the price of the Russian
government’s benchmark OFZ bond fell 70 basis points. In second place is Aton Capital’s Alexey Bulgakov, who also captures third in Fixed-Income Strategy. Bulgakov spent much of last year traveling
to promote local debt offerings to international investors; however, most were primary issues in which Aton was involved,
so he was restricted from making recommendations. “He focuses on quality credits and provides daily coverage of trading
flows,” notes one enthusiast. Alexey Demkin of Trust Investment Bank, at
No. 3, has “terrific access to management, deeper insights than anyone else and a wellspring of fresh ideas,”
says one supporter. Especially favored: Demkin’s market outperform rating on Sitronics’ 7.875 percent 2009 senior
notes. A maker of high-technology gear for consumers, Sitronics offered safe exposure to the rapidly growing technology sector,
Demkin reasoned. Recommended last August, at 99.625 percent of par value, the bonds were trading at 102.96 percent of par
Alexei Moisseev, Renaissance
SECOND TEAM: Nikolay
THIRD TEAM: Alexey
Kudrin, Troika; Pavel Pikulev, Trust IB
Capital’s Alexei Moisseev takes top honors in this new category. Moisseev,
34, who was ranked No. 1 in both fixed-income categories last year, “was the first to turn bullish on the currency when
everyone else was bearish, and he turned out to be completely right,” cheers one grateful investor. In an April 2006
report, Moisseev said that government spending on infrastructure was likely to rise in anticipation of this year’s parliamentary
elections and would trigger the central bank to tighten the money supply to fend off inflation, which in turn would strengthen
the ruble, then at 27.8 to the dollar. By mid-May 2007 the ruble had strengthened 7.8 percent, to 25.8 to the dollar. Moisseev’s
colleague Nikolay Podguzov, who joined Renaissance from Trust Investment Bank
last September, secures second place largely for a variety of “timely trade ideas,” affirms one supporter. In
January he pegged Absolut Bank, a non-state-owned lender, as a likely takeover target; in April, Belgium’s KBC Group
purchased 92.5 percent of it. The price of dollar-denominated Absolut 2009 notes promptly jumped from 100 to 104. Aton Capital’s
Alexey Bulgakov finishes in third (and is also No. 2 in Corporate Debt). Bulgakov
issued a bullish assessment of the ruble last August, one month after the government made it fully convertible, which he said
would boost demand. “Alexey is invariably responsive to follow-up queries,” says one admirer.