In context of last several months October was a bit unusual month for Russianequity market. The start of the month was very promising – with double digitperformance, new wave of public buying mania and new records of inflows to theRussia-dedicated funds (in mid October new inflows reached the record level ofMay 2008). However the music has abruptly stopped at the end of the month. Thesharp sell-off in the last week of October has sent the RTS Index almost 9%lower from its new highs for the year. Despite of the disastrous last week theIndex was able to end the month with decent 7.5% gain, however recent spike involatility revived already forgotten concept of investment risk.

The macroeconomic background remains moderately positive. Rosstat reportedthat in September GDP advanced by 0.5% MoM. Quarterly GDP growth for 3Q09 wasalso positive – +0.6% QoQ. It was first quarterly GDP growth in Russia from2Q2008. Unemployment level decreased to 7.6% in September from 7.8% in August.Retail sales in September however delivered a new portion of negative news –YoY decline was 9.9% compared with 9.8% in August. Encouraged by the graduallydeclining inflation rate and still very fragile economic recovery, the Bank ofRussia cut its refinancing rate by another 0.5% to 9.5% at the end of October.However this step of continuing monetary easing was largely unnoticed by themarket. This fact generally confirms the hypothesis that in current environmentof large surplus of global liquidity Russian equity market is mostly driven byglobal, not domestic news flow.

October was also very “hot” month for the currency market. During themonth the rouble has appreciated against the basket more than 2.5%. It should benoted that the gains would be significantly higher without massive interventionsof Bank’s of Russia which was practically the only rouble seller on themarket trying to prevent the rouble from the sharp appreciation. Suchinterventions allowed the Bank of Russia to increase its international reservesby USD 20 bln during last month to USD 432.8 bln.

On the corporate news front Utilities sector continues to attract significantinvestors’ attention. At the beginning of the month most of OGK’s (WholesaleGeneration Companies) surged by 15–30% in one day on the rumors thatgovernment will launch a capacity market in 2010. Later the demand has migratedto the Federal Grid Company’s shares on the announcement of significanttariff increase in 2010. Also shares of InterRao experienced significant jumpon the news that government will transfer some of its generation assets to thecompany.

In terms of Fund’s investments recent market sell-off started to shift ourpreferences again to more aggressive positioning. At the end of the month westarted to increase our holdings in Federal Grid Company and Power Machines.Moreover we started to build positions in two new names – Veropharm and TNKBP Holding.

Vitalij Sostak, Portfolio Manager, IMJSC Parex Asset Management

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