RUSSIAN STEELS: I Want to HOLD Your Hand
We downgrade the Russian steel sector to HOLD, maintaining a BUY only for MMK as: 1) we regard the valuations as fair – the inflated multiples observed at YE16 were driven by a positive structural market effect i.e. hopes of a turnaround in Russia-US relations; 2) the Chinese steel-rally momentum is wearing off on record production in July and gauges indicating economic headwinds and a cooling property market; 3) upside potential for domestic prices remains, but this is already reflected in consensus forecasts, and there is typically a decline in 4Q as the construction season draws to a close; 4) the main company-specific catalysts have already played out. MMK is favourably positioned due to its low vertical integration and domestic exposure, while the MSCI inclusion card is still playable, in our view.
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