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Interview of Alexey Zabotkin, Head of Investment Strategy at VTB Capital, for 103rd Meridian (Singapore)

26 March 2012
VTB Capital sets the standard


VTB Capital holds the absolute leading position on the Russian investment banking market almost in all business sectors. It has received the highest ranking bookrunner on the Russian and CIS equity capital market, top ranking among the M&A consultancy in Russia and CIS, as well as the number one ruble bookrunner according to Bloomberg and Dealogic. In 2011 the VTB Capital research team was ranked number one by the highly respectful international research agencies Thomson Reuters Extel Survey and Institutional Investor All-Russia Investor Survey. 
103rd Meridian asked Alexey Zabotkin, Head of Investment Strategy at VTB Capital, how the situation in the capital market and the key sectors of the economy will develop in 2012.
- What influenced the Russian market development in 2011?
- From the point of view of the market situation, 2011 was divided into two parts. The year started with the positive market action from December 2010 which brought hopeful sentiment into the new year. This action was aided by the influence of the US fiscal stimulus, rise of oil prices in response to the Arab Spring, expectations of an acceleration of structural reform momentum, and the resolution of uncertainties related to the 2011-12 Russian election cycle. These factors indeed wrote the script for the better part of the first half of 2011. However, the second half played out to a substantially different tune. 
Foremost, external factors turned out to be more hostile and unpredictable than our fairly reserved outlook envisaged. The looming debt crises faced by the developed economies, with Europe in particular and, the economic slowdown in China which weighed on the commodity markets in the autumn. And last, but not least, Russia’s political landscape proved to be quite erratic, despite Prime Minister Putin announcing his intentions to return to the presidency, but especially in the immediate aftermath of the December State Duma elections, Thus the RTS index, the principal benchmark of the Russian stock market, ended the year down 22%, marginally behind MSCI EM (-20%), even as the 2011 average oil price was the highest yearly print ever ($111USD /bbl for Brent).
- There were discussions last year about turning Moscow into an international financial centre. Have you had any success in this field?
- Market volatilities notwithstanding, substantial progress was made in the area of capital markets infrastructure. President Medvedev personally has been pushing the financial reform agenda in the light of the vision of Moscow as a new international financial centre. 
The most tangible achievements of 2011 was the adoption of the law on the central depository and the merger of MICEX and RTS exchanges into a united trading and clearing platform. These interrelated developments are of significance both for bond and equity markets. They shall simplify foreign access to the Russian on-shore exchange-traded securities, and will make Russian domestic sovereign bonds Euroclearable. This will also allow for the implementation of the T+2 and T+3 settlement for the equity market, which is the global standard. 
These steps shall broaden the investor base, while also increasing the liquidity depth on the merged MICEX/RTS exchange.
- In light of recent events in the world, what do you think are the prospects of the Russian market in 2012?
- Our outlook for 2012 is more optimistic than, for instance, the current market sentiment resulting from the underperformance of December and, generally the lacklustre results of 2011 at large. In short, we tend to see 2012 as a mirror image of 2011.
Namely, in the second half of 2012, we expect the return of the bull market in global equities, as the global cyclical slowdown bottoms towards year end. However, markets move ahead of the economy.
Furthermore, as the dust settles in March at the conclusion of Russia’s own election cycle, the next administration will prominently outline its medium- to long-term economic and structural policy agenda. Upon seeing this new policy, Russia’s unreasonable underperformance of the second half of 2011is to be reversed.
- Shares of what companies and in what sectors do you regards as most interesting? And what sectors on the contrary as unsteady? 
- As the first half of 2012 may continue to see rather volatile sentiment and market action, we favour deeply underappreciated oil stocks, severely beaten down, but not cyclical. , I also favour electric utilities, and precious metals producers, which were decoupled from the rise in the gold prices. 
If the second half of 2012 sets a more positive picture towards cyclical sectors, the metals & mining shall do very well. 
At the moment we are more reserved on food retail and fertilizers, while Banks, as a cyclical play, might also have to wait until the international perception of financial stocks improves somewhat.
- What events will be crucial for the Russian capital market in 2012?
- The topics of most relevance for the Russian stock market in 2012 can be grouped into three sets; global uncertainty, Russian domestic outlook, and the stability of the equity markets. On the global front, the cyclical slowdown of the world economy, European struggling through severe fiscal crisis, and the geopolitics (namely, Iran) are to remain at the centre of attention. 
Russia’s top-down themes are the presidential elections and political reforms initiated by President Medvedev last December; fiscal policy outlook; natural monopolies tariffs; privatisation; and two topics related to economic integration and trade liberalisation – Eurasian Union initiative and WTO accession. 
As for the issues of specific significance for the equity market, the push to improve the corporate governance in the state-owned companies, dividend payouts, and implementation of the market infrastructure reforms are the themes to watch.

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