October witnessed significant deterioration in global markets as fears of a systemic banking collapse wracked markets and concerns of a deep global recession grew. Volatility reached unprecedented levels early in the month as investors sold assets to raise cash, irrespective of fundamental value or long term stability as compulsory de-leveraging by banks, hedge funds and oligarchs meant market chaos became the norm’.

In this environment the weakness of the capital structure of emerging markets was once again underlined, Russian equities, in particular, were crushed, even after the enormous value destruction that had been witnessed in the previous months. A perception that Russia would suffer due to its dependence on commodities may have explained part of this selling fury, but the continued forced selling of many leveraged domestic players led to a complete rout of the market that had not been seen since the crash of 1998. When the dust had settled the RTS index closed the month down 36%, with the mid cap RTS2 index down over 46%, and the bull market rally of the last four years had evaporated.

I believe this is the time to go “long only” based upon our belief that the market is –

a) Completely oversold and driven to these levels only by margin liquidation

b) The cheapest stock market in the world and cheaper than at any time since 1999

c) That the forced selling that led to the capitulation of the market has, largely, run its course.

To highlight why I think Russia is straightforwardly mis-priced, I present the following data comparing Russia’s domestic economic situation now, compared to the last crisis in 1998:

1998 versus 2008;

-GDP per capita, $1800 v. $12000;

-GDP growth, -5.3% v. 7.0%;

-Inflation, 84% v. 15%;

-Unemployment, 13% v. 5.6%;

-Public debt as a % of GDP, 42% v. 5%;

-Trade account, $16.4B v. $200B;

-Foreign currency reserves, $12.7B v. $500B;

-Stabilization fund, $0 v. $190B;

-Tax collection as % of GDP, 8% v. 22%.

Where appropriate, I have been switching from mid cap exposure to blue chip exposure, as it is my view that blue chip stocks will move first when the anticipated market recovery begins, and many are trading at P/E’s below 2,. Surgutneftegas, for example, is on a P/E of 2 and has a market cap’ below its cash holdings. Since inception in January 2007 the market has fallen 60%, even though the oil price has merely returned to where it was 22 months ago. However, if I am correct and much of the selling of the past two months has been margin related liquidation rather than discretionary selling; a return of confidence could spark a giant rally. Were the market merely to return to levels of late June this would represent a rise of 271%, in comparison the Dow Jones Industrial Average would only have to rise 28% to return to end of June’s level.