Evgenia Obukhova
New life of the Moscow exchange
The Moscow Exchange has re-opened after a long cessation of trading in February and March and has resumed operations in the Russian market. The main volumes are provided by private investors; with involvement of non-resident investors from friendly countries expected in the future. Investor preferences change and traders are switching to new instruments due to many companies not paying dividends, no stock market growth drivers, and excessive volatility of the usual currencies.
Private traders – foundation of the market
The stock market could not help but react to the late February events. After recommencement of trading, the Moscow Exchange reported a noticeable reduction of volumes in practically all segments – from forex to forward markets. As to the most popular with private investor’s stock market, significant changes took place. Let us remember that in late February the Central Bank had forbidden to the sale of securities for the benefits of foreign clients, and the latter to move collected coupons and dividends abroad.
Therefore, when foreigners, who occupied a half of the market, were not able to conduct transactions anymore; traded volumes shrunk on average 2-3 times. The main indicator of value of Russian companies – index of the Moscow Exchange has also declined. After the number of companies, including GAZPROM, did not pay dividends for 2021, the market cannot yet find new reasons for growth.
The trader’s composition has significantly changed. So, for example, earlier, the stock market was divided in half between non-resident investors and individual investors, but now private traders practically dominate the stock market: in June 2022 their share grew to 74% in comparison to 40% in January 2022.
The Russian banks are traditionally main players in the bond market, even then Russian private investors’ shares increased from 17.8% to 25%.
Even more so, during the first half of 2022, the total number of Russian citizens owning brokerage accounts at the Moscow Exchange has grown from 17 to 20 million people. Individuals still wait to see, but at some moments buy. The latest “Review of financial markets’ risks” of the Bank of Russia says, that between April and June of this year retail investors purchased stocks of Russian companies for 21 billion rubles.
“In just one day, on June 30, when the market was in negative territory due to GAZPROM’s decision not to pay dividends for 2021, individuals invested in gas holding stocks – 100 million rubles. Thus, even against this negative backdrop and subsequent volatility, the citizens did not exit from the said assets, increasing their investments”,-authors of the review comment.
In the future the Moscow Exchange will see active investors from friendly countries. Currently the market is in discussion with the participants and the regulator on how to divide between investors from friendly and from unfriendly countries. The key question is – how to trace the chain of beneficiaries so that the latter do not use this chance given to investors with registration in the friendly jurisdictions.
New opportunities
In such an environment the investors’ preferences change. The stock market does not promise significant increase in the near future, so traders look at other instruments. The friendly countries’ currencies are becoming more popular; this spring, volumes of trading of pairs yuan-ruble, tenge-ruble, and Hong Kong dollar-ruble grew. The Moscow Exchange, in turn launched two new currency pairs in June – the Armenian Dram and the South African Rand and keeps working on the list’s expansion. The soft currencies gradually push away customary dollars and euros, preemptively due to the sanctions risk of the latter.
One more cluster of instruments, that could be in demand by investors under the new conditions – precious metals and derivatives. Thus, banks report a steep increase in demand for bullions, and market traders – for futures on precious metals – a more simple operation than buying gold bullion, and also requiring less capital.
Finally, the commodities instruments segment looks promising. In turn, the Moscow Exchange, anticipating demand, started, in the spring, a calculation of index of cost of wheat, OTC export indices of sunflower oil and ground oil-cake; in July the index of cost of wheat futures started.
“Among different assets, considering the situation, precious metals are promising; floating revenue bonds, correlating with inflation levels and economic interest rates as well as some stocks of commodities companies and foods companies. However, in terms of stocks, the probability is high that we have not seen the bottom yet”,-argues Dmitriy Alexandrov, the principal of the department of anlytical research with investment company IVA Partners.
He reminds us, that based on 50 years of past practice of economic and market cycles, after a high inflation period, the most profitable are commodities assets, and companies stocks catch up in terms of gains, some time later.
“The interest towards friendly countries’ currencies will be higher, the more actively they circulate in daily practice and are used by SMEs”, – added Dmitriy Alexandrov. – Yuan is highly attractive and it is in demand as a dollar and euro alternative. Commodities futures linked to Russian delivery basises are also actively developing and in case of established logistics, will be in demand on the part of real sector and financial players”.
Vitaliy Isakov, director for investments with OTKRYTIE Management Company, believes that private investors will still focus on stocks. “Forex and commodities futures are instruments for hedging or speculation, but are not suitable for investments, and therefore are not suitable for the majority of investors”,-says Isakov. However, he agrees that assets, nominated in currencies of friendly countries, could become attractive and the list of assets accessible via the Russian markets will expand.
It is possible that, within 3 years Russian stocks may yield very attractive revenue, supposes Isakov. “The recovery of the bottom line and dividends payouts by Russian companies in the coming three years, which would correspond to the dynamics following the 2008 recession and return of historical averages of valuations (not high in comparison with global levels) could lead to tripling of the Russian stock market from its current level, which corresponds to a 50% gain per annum within the next three years”, – summarizes the director for investments with OTKRYTIE Management Company.
The PROMSVYAZBANK (PSB) Management Company believes that equally attractive for investments are forex, precious metals, and stocks. “Forex – is the most basic instrument and we already see that the volume of investments in yuans has grown manyfold as well as the balances on accounts,– says managing director for investments Andrey Rusetskiy at the PSB Management Company. – As long as new investment instruments nominated in yuans appear, the interest will only increase.
The second core instrument, according to Rusetskiy, is physical gold, which could cost less in hard currency terms but will greatly protect the ruble from devaluation.” The rest of the other derivatives are rather complex for the lay investor,– states the director for investments at the PSB Management Company. – Usually the potential growth of resources value plays catch-up via buying companies’ stocks, not via derivatives on the given underlying asset”.
As to the coming 1-3 years, the PSB Management Company also suggests looking more closely at stocks due to their growth enabler being a weaker ruble as well as potential recovery to recent levels. “History shows that on average, stocks recover two years after the bottom of the market, after which growth occurs at around day 200. ”, – reminds Rusetskiy.
