STOCK MARKET OUTLOOK

After 135% of gains in Ukrainian PFTS index in 2007 the market has
become one of the most expensive by P/E. This ratio stood at 22x in
December 2007 while the banks were traded above 4x of their book
value. Second fastest growing market in the world has become
overvalued and a number of factors contributed to 67.7% market
decline YTD:
• negative perceptions of foreign investors towards Ukrainian
economy (record 10-years inflation, more than 2x widening in trade
deficit y-o-y as of 1H2008, lack of progress in privatization, liquidity
deficit and cost of funds increase)
• expectations of drop in steel prices and declining margins of steel
and mining companies
• speculations on imported gas price in 2009 and on inability of
domestic industrial companies to cope with gas price appreciation
• speculations on decreasing orders in engineering sector from Russia
• a more cautious stance of investors towards EM in general

The above-mentioned expectations proved to be hardly justified so
far, however the equity market declined precipitously, becoming
rather undervalued with average P/E falling below 9 in September. A
massive sell-off has been additionally triggered by hryvnya
appreciation but low liquidity has also played an important role. As
total market free float stands at a negligible 4% (compared to 24% in
Russia) even small sell-off results in a notable drop. Total free float of
Ukrainian equities, which exceeded $4 bln in late 2007 has declined
to $1.9 bln in October 2008.

As interest to EM is renewed, current valuations are attractive enough
to lure foreign equity funds and to drive the market upwards. We see
the highest growth potential in steel and mining sector, agriculture,
engineering and chemicals. We have chosen 7 most liquid stocks with
the highest upside potential from 3 sectors.