Markets hit by politics as players wait for buyers to return

The rocky performance of the Russian markets reflects investor nervousness about political risk. Despite big falls over recent weeks analysts are looking for a rebound saying Russian stocks are cheap, and the country’s

Finance Minister Alexei Kudrin says capital flight due to the conflict in South Ossettia has reached 7 billion dollars. The slump in Russian stocks has continued, with the RTS losing 8% so far this week pushing it below the 1600 mark.

Analysts say, however, that Russia’s strong fundamentals are keeping longer term investors in, and investment banks are anticipating a rebound. Igor Prokhaev, from equity Sales at Troika Dialog says more negative press may cause further falls, but the biggest drops are past.

“In the the short term investors, usually speculators, are playing on all this news.  Probably we will see some more poor headlines on this event.  But in general I think we already saw the bottom of the market, at least regarding these events in Georgia and South Ossettia.”

The sell off means Russia’s stock market is one of the cheapest in the world according to Renaissance Capital. Erik DePoy from Alfa Bank agrees that Russian markets are over-sold – and is looking for investors to return.

“Its almost like no one wants to be the first one to make that step. They don’t want to be the first ones that get burned.  But I think what will happen is that once a couple of investors do put money in the market, say next month when they return from vacation, then it will draw some attention, like OK maybe now’s the time to get in, and then you’ll see a pretty sharp rebound.  Lets wait for the end of the year.”

The flow of the negative Russian news – including the battle for control of oil giant TNK-BP and the Mechel crisis – has seen the market slump almost 40%. That's the biggest fall since the 1998 crisis. The Russian market is attractive but confrontation with the west may continue to drive negative sentiment for some time.