The trading floor of the Moscow Interbank Currency Exchange (MICEX) in May 2006.
Photo: Yury Martyanov
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Untraditional Trends
The Russian Stock Exchange (RTS) grew 5.5% over the first half of 2007, and the Moscow Currency Exchange (MICEX) grew 6.1%. In comparison with the growth of these indices over the first six months of last year, which was 25.5% and 31.6%, respectively, these results are less than impressive. In addition, although the volume of trade on MICEX has almost doubled since the beginning of this year, trade volumes on the RTS have hardly budged at all. At this point, the market is simply treading water before the approach of autumn, which is traditionally a season for the formation and consolidation of trends on the stock market. It remains to be seen whether the markets will be headed up or headed down.
Nothing for Half a Year
Serious movement is usually not observed on the stock market during the summer. During the summer "side road," a feature that is not unique to the Russian market, the activity of market players falls everywhere. What is unusual is that the Russian market has been on this side road since the beginning of the year. The last six months are remembered for several large IPOs, as well as for a short (lasting for two weeks) and a relatively shallow (10%) spring correction, but there has not yet been a steady drift in the market that would have allowed observers to speak of definite trends.
Since the beginning of the year, the RTS and MICEX have probed the 2,000 and 1,750 point markers, respectively, but they have been unable to break through these barriers for good. In only the first six months of 2007, the market has survived three downturns and three upswings, and overall it has grown by 5.5% - an extremely modest result compared to its 25.6% growth in the first half of 2006 or the 16.7% increase over the same period in 2005.
At the same time, trading volumes can be observed moving in different directions on the leading Russian stock exchanges. The volume of trade on MICEX grew 1.7 times over the first half of this year, while the volume of trade on the RTS has stayed relatively stable, with a small downward tendency towards the end of the six-month period.
This can be explained by the fact that a fairly large number of new players appeared in the market over the period in question. New participants are being drawn to the stock market by advertisements, and the number of clients and the resources commanded by players in the market are gradually increasing. The clients in question here are, of course, small fry – heavyweight clients have been trading on the RTS for a long time. When the market is stagnant, some of the simplest mechanisms for retaining small private investors are short-term speculation operations that allow market players to secure the necessary revenues for their clients and also to increase their own commissions, since the overall number of operations is fairly large. Since these operations are short-term and thus carry little risk, they attract significant numbers of people in the market who want to buy, as well as those who want to sell. Overall, the movements of the market players balance each other out and do not constitute a trend.
Analysts also agree with this point of view. For example, Sergei Yurov, the head of the analysis department of the investment company Barrel, told Dengi that "the volume of trading on MICEX really has increased over the last half year. And the reasons for that are an increase in the number of players (specifically speculators, not investors) and an increase in the volume of funds funneled into short-term speculation."
Stagnation Factors
Large packets of shares are trading sluggishly on the RTS mainly because investors cannot decide on the best course of action to take. Even when there is a formal equilibrium in the market, it is still subject to threatening flashes of volatility, such as the one that occurred in May and June of this year when portfolio investors suddenly began to cash in their Gazprom and other Russian blue chip stocks. In a situation like that, many market players prefer to simply wait it out and hold onto their stocks until a definite guiding trend can be distinguished.
The Russian financial market is stagnating largely because alternating positive and negative factors end up compensating for each other. For example, a generally positive tendency in April was canceled out by the consequences of some large IPOs that seriously diluted the market. As a result the Russian market fell, in contrast to most other stock markets at the time: the stagnation that characterized the first half of this year in Russia took place against a backdrop of strong growth by markets worldwide. For example, the American Dow Jones Index grew by almost 9% (a fairly high number for an economically-advanced country) over the last six months; Brazil's Bovespa grew by 25%, and the Chinese index SSEI increased by 54%.
Yet another factor that has prevented a definite trend from being distinguished in the first half of this year is the internal political uncertainty that tends to characterize election years. The issue is not so much the outcome of the elections as the fact that the government often changes its economic policy on the eve of elections, and in a way that the majority of the market players find impossible to predict.
And economic policy really has changed: over just the last six months, there has been an abundance of statements from senior officials concerning the government's priority support for this or that sector. But since the budget has not yet supplied any funds for any of this support, the skeptical financial market is still waiting for the government to put its money where its mouth is.
A Formative Autumn
We will risk saying that an upward trend is taking shape in the Russian market as fall approaches. This opinion is based on the sufficiently high likelihood that several positive factors will impact the market simultaneously. Together they may even break the influence of any prevailing negative tendency.
First of all, the factor of political uncertainty will disappear. The pre-election campaigns of 1999 and 2003 were accompanied by "Duma rallies" on the stock market: the market surge before elections has already become a tradition. The essence of the issue is that from the moment the elections get underway, it is usually already clear which sectors are going to receive government support in the near future. That certainty then has a positive effect on the behavior of portfolio investors.
Weak hope that the attitude of investors towards developing markets had changed for the better had already appeared at the end of June. In particular, this hope was boosted by the flow of funds into the markets of Russia and the CIS during the first and third weeks of June, which followed eight weeks of outflows. A decrease in the rate of withdrawals from Chinese markets was also observed. Despite the fact that it is still too soon to talk about a return of investor interest in the assets of developing countries, this tendency could strengthen by the fall, particularly since the Russian market appears stable and attractive in comparison to other developing markets.
Another factor could be the continuing slide of the dollar and the strengthening of the ruble, although this factor could easily have negative as well as positive effects. On one hand, the strengthening of the ruble could lead to an outflow of funds from the ruble/dollar pair to ruble assets. On the other hand, an excessively strong ruble could cause difficulties for exporters, particularly oil and gas companies, whose stocks make up a significant portion of the Russian stock market. It would be particularly unpleasant if this happened on top of the traditional autumn growth in oil prices that is linked to the beginning of the season when heaters are switched on in the countries that buy large quantities of Russian energy products.
Time has shown that the Russian government's policy of curbing inflation includes the strengthening of the national currency as one of its basic instruments. At the very least, the Russian Finance Ministry is not yet considering borrowing plans for the second half of this year that would involve significantly cutting back on the volume of new federal loan bonds issued in comparison to the first half of 2007. Since inflation usually grows in the fall, this could lead to the ruble being strengthened more often. Analysts agree that the strengthening of the ruble could have some influence on the stock market. As Veles Kapital chief analyst Mikhail Zak explains, "without a doubt, some investors take the strengthening of the ruble into account during operations on the market. In connection with this, some of them prefer to buy bonds in rubles. But many players don't pay any attention to this, since the possibility of making money off exchange rate differences is small compared to earnings on the fluctuations of the market value of stock."
In general, the prospects for the Russian stock market in the approach to the fall look encouraging, although for the time being the markets are continuing to stagnate, and this slump will probably be with us for at least another month. There are positive tendencies, but they are still weak. However, the situation promises to change drastically in the fall, when a bull market could take over.
Maria Glushenkova and Pavel Chuvilyaev
All the Article in Russian as of July 16, 2007
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