December 1, 2008
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Home / Issue Archive / 2008 / September #9 / Have Russian Markets Bottomed Out?

№ 9 (September 2008)

Have Russian Markets Bottomed Out?

Year to date the RTS is off 63%; MSCI GEM is down 50%, and the MSCI is down 40%. (close at Oct 9th)
Prime Minister Putin says that Russia will put 175 bln (approx $6.7 bln) rubles into the equity market next week. That is approximately 5% of the current free float of the total market.

By Chris Weafer, Chief Strategist, UralSib Bank

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Year to date the RTS is off 63%; MSCI GEM is down 50%, and the MSCI is down 40%. (close at Oct 9th)
Prime Minister Putin says that Russia will put 175 bln (approx $6.7 bln) rubles into the equity market next week. That is approximately 5% of the current free float of the total market. The government at least thinks that valuations are very over-sold and that the market is close enough to the bottom to justify this action. In that regard it is a smart investment decision. The government cannot be faulted for the actions it has taken in recent weeks. Its decisions have been pragmatic and sensible and, despite any criticism about using the Sovereign Wealth Fund in the local market, this is another sensible move.
The government also released the budget summary for the 1st nine months of the year and revealed a surplus of approximately $100 bln or 8.1% of GDP for the period. That shows Russia to be a very different, i.e. more favourable, risk category to most other countries i n the world, developed or developing. It also shows how extremely overdone has been the market collapse.
The collapse in the price of oil this morning was probably the last straw and brought to an end any internal debate in government over this strategy. Over the 1st nine months of the year the country earned an average $1 bln every day from oil and gas exports while Urals averaged approximately $110 p/bbl. The price today is 30% lower and falling.
It is a reasonable assumption that the money will primarily be used to buy the shares of stake controlled companies, specifically Sberbank, VTB, Gazprom and VTB. The “people0s IPOs”, especially the banks will be a priority target. Rosneft is down 55% year to date, Gazprom is down 64%, Sberbank is off 70% and VTB is down 79%.
No details yet as to what mechanisms will be used or how quickly the money will be invested – most likely quite slowly in the hope that the statement of intent will be effective in building some confidence in the markets, i.e. as the state puts itself in the place of “market insurer” or “buyer of last resort”, and attract in other buyers.
The reason why the State has had to become the “buyer of last resort” is because of the structure of the market. This is one of those “disconnected” growth factors that afflict the economy and the investment case. Russia does not have a significant base of domestic long-term inve stment capital. The role usually provided by pension funds, mutual funds and other long term savings vehicles. They are relatively insignificant in Russia. Most domestic investors are traders and at times like this, they choose/are forced to stay out of the market.
The $1.3 trillion that Russia has earned from oil and gas exports since January 2000 had pushed the value of the market to $1.5 trillion in mid May and led to the strong fiscal position that the country is in today. But no amount of cash can accelerate the building of an efficient bureaucracy or economic infrastructure. That simply takes time. In financial terms Russia is properly in the G8 – in structural terms it is still a developing economy only 10 years on from near bankruptcy.
That’s w hy this is a sensible decision and why it is necessary.
Of course the state is also protecting its own investments. In mid May this year the value of the State’s direct and indirect holdings in the equity market was approximate ly $750 bln. Today that figure is close to $260 bln. Putting in an additional $7 bln to average down and protect the downside it also good portfolio management.
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