We see downward pressure easing a little with discounts to emerging and frontier markets widening past the 2009 highs (now at around 50%),

devaluation fears subsiding somewhat and the steel market outlook stabilizing. This all suggests more lateral pressure building up. Having posted a

negative result for December only twice in the past decade, the Ukrainian market, having broken the 1,500 point resistance, may have bottomed out and should finish the year slightly higher.

Volatility and a thinning domestic market are all keeping the risk of calling a year-end UX Index level high. We were correct to turn bearish in May and in early October set a 1,250-1,500 trading range target for the UX Index going forward, which has proven accurate for the month that followed. We now revise our year-end target, which has effectively been suspended since June due to the extremely low predictability of market sentiment. We set our new year-end target at 1,730, with a range between the worst and best cases of 1,536-1,932.

Steel prices and the Baltic Dry Index, which is used in the shipping industry, indicate lateral pressure with a slight downward tilt. However, given the

substantial sentiment component driving the markets these days – coupled with the already diminished gap in equity performances versus steel prices, which we believe has bottomed out – the further convergence call weakens, albeit more evidence of this would be reassuring.

The remainder of the year is also somewhat tainted by negative sentiment associated with potential hurdles in signing the EU Association Agreement, due in part to the imprisonment of Yulia Tymoshenko, as well as the seemingly certain delay of the next IMF tranche’s disbursement until 2012. It could be debated that some of this negativity is already priced in and mitigating sentiment may come from the energy sector privatization. However, the key determining factor remains outside Ukraine and largely rests in the hands of the EU policymakers.

For the rest of the year, we like metals and mining, manufacturing and consumer names. Additionally, we see utilities and telecom stocks as potential outperformers due to privatization and the anticipated sale of Ukrtelecom’s mobile business, respectively.

Roman Zakharov