Our in-house view on the markets in 2012 is cautiously optimistic, as our base scenario does not envision a recession in the Eurozone, or its breakup, which will make markets pay more attention to fundamentals and valuations. From this angle, Russia looks extremely cheap with P/E 2012E at 4.9x. This is 31% lower than 7.1x in the troubled Greece, which, in our view, is unjustifiable. Still, we expect very high volatility in 2012, especially in the first half of the year.

We see the fair levels of MICEX and RTS Indices at respective 1,919 and 1,962, which imply 39% and 41% upsides from the current levels of 1,378 and 1,387. However, we stress that these ¡§fair levels¡¨ could only be reached under the ¡§normalized¡¨ markets situation, which has a considerable chance not to materialize in 2012.

In Russia, we would recommend to concentrate on liquid dividend stories and “special situations”, such as preferred stock of Rostelecom. In terms of sector allocations, we anticipate oil & gas sector to outperform the market on the back of expected sector performance catch-up to oil price. We also note the sector¡¦s stronger resilience to macroeconomic volatility compared to other sectors, due to taxes linked to the oil price and flexibility of ruble denominated costs.

Eoin Treacy's view Russia has persistently traded at lower valuations than one might superficially expect, not least because of uncertainty surrounded governance and the treatment of minority shareholders. One of the defining characteristics of the Russian market is that it is viewed as a high beta proxy for the energy and industrial metals sectors.

The RTS Index has a reasonably similar pattern to some of the major miners, such as BHP Billiton or Rio Tinto, but has lagged somewhat. While both shares broke above their respective 200-day MAs this week, the RTS is testing it. The Index is challenging the almost yearlong progression of lower rally highs and a sustained move below the December low near 1330 would be required to question medium-term scope for some additional upside.