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Emerging Markets Report

Nov. 5, 2008, 4:05 p.m. EST

Equities in Moscow end with gains, but ADRs fall

By Polya Lesova, MarketWatch

NEW YORK (MarketWatch) -- Equity markets in Moscow ended with gains Wednesday after staying closed for a holiday during the previous two sessions, while Russian shares listed in New York and London posted steep losses.

In Moscow, the dollar-denominated RTS index rose 3.4% to end at 829.80 points.

At the Micex, Russia's other stock exchange, equities surged earlier Wednesday, causing a temporary suspension in trading, according to a statement published on the exchange's website. By the end of the day, the gains were pared and the ruble-denominated Micex index ended up 1%.

"Russia is still driven by global sentiment -- lately that has been positive. I'd expect the market to consolidate over the next few days unless oil recovers strongly."

James Fenkner, Red Star Asset Management

"Today's rally is not really a rally -- the RTS was closed Monday and Tuesday and is just catching up to London ADR prices," said James Fenkner, principal and portfolio manager of Red Star Asset Management, a hedge fund that invests primarily in Russian assets. "Based on Tuesday ADR prices, the Russian market is actually weaker today."

Russian equities have been battered in recent weeks as investors rushed to sell on concerns over the global financial crisis, tumbling oil prices and heightened domestic political risk. The RTS stock index has tumbled 64% year-to-date, making it one of the worst performers in the world.

"Russia is still driven by global sentiment -- lately that has been positive," Fenkner said. "I'd expect the market to consolidate over the next few days unless oil recovers strongly."

Russian banks suffer steep losses

Russian banks lost 42.2 billion rubles, or $1.6 billion, from their securities portfolios in September, strategists at UniCredit Group said Wednesday, citing data from the country's central bank.

The year-to-date losses amount to 93.9 billion rubles, or $3.4 billion, UniCredit said in a research report. The losses came from both equity and fixed-income securities.

"The jump in interest rates resulting from the liquidity squeeze and the higher credit risks had a strong downward impact on the value of fixed income securities, cutting their prices by more than 10%," the UniCredit strategists said. They don't expect the losses to be recovered in the fourth quarter of the year as credit risks appear to be rising.

Total overdue loans of Russian banks increased to 1.45% from 1.33% in September, UniCredit said.

"We believe that further asset quality deterioration is inevitable and advise investors to steer clear of the Russian banking sector for the time being despite the attractive valuations," UniCredit said.

Russian ADRs fall

Despite the gains in Moscow, U.S. and London-listed shares of many Russian companies fell Wednesday.

/zigman2/quotes/200464876/composite RSX 5.65, 0.00, 0.00%

The Bank of New York Mellon Russia ADR Index fell 11%, led by an 18% drop in shares of Vimpel Communications . Also in the communications sector, Rostelecom dropped 11% and Mobile TeleSystems fell 6%.

Steel producer Mechel (NYS:MTL) tumbled 12% and food producer Wimm-Bill-Dann Foods (NAS:WBD) fell 12%.

The Market Vectors Russia ETF (BATS:RSX) , which tracks the Russian stock market, fell 14%.

In London trading, shares of oil giant Surgutneftegaz (LON:UK:SGGD) dropped 10%, Rosneft tumbled 18%, and Gazprom fell 7%.

Shares of mining giant Norilsk Nickel (LON:UK:MNOD) dropped 22% and VTB Bank fell 10%.

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