August is often the cruellest month for Russians, and the 2010 vintage looks no different with wildfires blazing across large swathes of the country.
Maybe it's pure coincidence the most disastrous news flow over the last dozen years has coincided with this month: the debt default in 1998; the sinking of the Kursk submarine in 2000; terrorist attacks near the Moscow subway and on two airplanes in 2004; the war with Georgia in 2008; and the explosion at OAO RusHydro's power station in 2009. Bad things happen in August. That's why you should sell now.
An ominous seasonal pattern is discernible, so investors should react accordingly. With the mercury and the equity markets having risen in tandem during the summer, benchmark indexes are vulnerable to the impression that August will be unlucky again. The overriding concern is that the present emergency threatens to derail Russia's economic recovery.
So how do you protect your portfolio? Sell shares in companies on whom the government will lean to plug budget gaps or contain inflation.
OAO Gazprom has long been used to subsidise other parts of the economy, and the Finance Ministry has made it clear that taxation of oil companies such as OAO Lukoil and OAO Rosneft will remain high to balance the revenue- expenditure ledger. Oil stocks can be expected to shore up government finances.
The heat wave has reduced Russia's grain harvest by at least 20 per cent and deprived the country of export revenue.
Last week, Russia banned grain exports from August 15 until the end of the year to contain domestic prices.
One might expect utilities to fare well in this environment. They won't. OAO Mosenergo, for example, has seen electricity consumption rise 15 per cent in the last two weeks, but water shortages are starting to strain power generation.
Since utility bills comprise a large percentage of the inflation basket, the government will delay tariff hikes to tame the consumer-price index. It is estimated the drought will add 1.5 percentage points to the CPI next year, and higher budget spending to deal with the costs of the emergency will aggravate that further.
The inflation genie may wreak havoc again, forcing the central bank to reverse its recent policy of lowering interest rates and thereby choking loan growth in the banking industry.
This is bad news for banks such as VTB Group and OAO Sberbank, which compete for deposits to repair their balance sheets and whose net interest margins are under pressure as a consequence.
The debilitating effect of high temperatures on the economy has already been cited by VTB Capital's purchasing managers index, which dropped to a four-month low of 54.2 in July, and by several companies, including carmaker OAO AvtoVAZ, which suspended production this month.
