Foreign Investment Makes Big Comeback
Foreign investors spent a record sum – $140 million – on the Russian stock market in the week ending October 10. Analysts expect that volume to grow as the world financial market stabilizes and the political situation in Russia becomes more certain. The Russian market is undervalued in comparison with other developing markets, which makes it attractive for investors.
A record influx of funds from foreign investors was recorded last week. According to the Emerging Portfolio Research Fund, the influx of funds onto the stock markets of Russia and the CIS in the week ending October 10 reached $140 million, a record for the last two years. A larger volume was invested by foreigners only in February 2006. The influx is continuing for the fifth week. It amounted to $65 million in the previous four weeks. The RTS index has risen 4.4 percent since the beginning of the month and reaches historical highs almost daily. Last Thursday, it reached 2174.45 points, 13 percent higher than a the beginning of the year.
Foreigners have returned to the market for long-term instruments as well. Their presence was discernible at the auctions of Vneshekonombank and Rosselkhozbank securities. “Since the peak of the liquidity crisis in the second half of September, the income from the majority of issues of the first and second echelon have dropped 0.5 percent,” noted Renaissance Capital analyst Nikolay Podguzov. GK Region analyst Alexander Ermak added that the strengthening of the ruble against the dollar also triggered foreigners' interest in Russian securities. “It stimulated foreign capital to come onto the Russian stock market,” commented Alfa bank analyst Erik DePoy. In the first ten days of October alone, the Central Bank bought $4 billion in currency from foreigners. Since the Bank is failing in its attempts to hold inflation in check, the strengthening of the rubles will continue. “The strengthening of the ruble is the most effective method for fighting inflation,” commented Deutsche Bank senior economist Yaroslav Lisovolik.
Until recently, the influx of foreign capital was formal in nature. That was due to the political risks after the resignation of the government, especially coming as it did on the eve of parliamentary and presidential elections. That was one of the few factors that stopped foreigners from investing in Russia.
“Until recently, Western investors had no clarity about the political situation in Russia,” explained Sergey Semenov, head of the Russia and CIS business development department at KPMG. “That led them to be cautious, which was expressed as delays in investment.” The signal for foreign investors to begin buying stock was Russian President Vladimir Putin's decision to head the United Russia Party list in the State Duma elections. “The president's decision was perceived as the maintenance of the existing political course and led to a reduction of political risks,” Lisovolik continued. The reduction of political uncertainty in the country led in turn to a reassessment of risks by hedge funds and the influx of capital. In addition, the president's decision coincided with the beginning of the new financial year in the United States. “Foreign funds took advantage of the developing situation and set new limits for Russia,” said Sergey Zharov, operations director for the capital market at KIT Finance Bank. Moreover, the Russian stock market lagged far behind markets of most developing countries this year. In the second quarter, stock indexes even placed in the 20 least dynamic in that set. Markets in Brazil, India and China gained 30-120 percent, while the Russian market rose by about 10 percent.
Because of that lag, the stock of Russian companies became undervalued in comparison with analogous ones in other developing markets. According to estimates made by Renaissance Capital analysts, that discount is still in force. They calculate that companies in the oil and gas sector are being traded at 16 percent below those in other developing markets. The discount on metals companies is 43 percent. “The psychology of stock markets is such that they seeks the most undervalued assets ad begin to invest in them,” noted Renaissance Capital analyst Ovanes Oganisyan. In the autumn, conditions on the raw materials market were quite favorable for Russian companies. Oil prices reached a record high in trading on Friday when futures for American WTI oil went for over $84 per barrel.
Analysts at Deutsche Bank, Troika Dialog and Uralsib agree say that the RTS index will reach 2300-2600 points before the end of the year. “In the fourth quarter, the influx of money from foreign funds will continue, and a pre-New Year's rally can be expected soon,” Uralsib analyst Leonid Slipchenko said. Alfa bank analysts are less optimistic and expect the RTS index to end the year at 2150, in spite of the fact that it has exceeded that indicator. “A U.S. Federal Reserve Board decision at its nest session could spoil everything,” observed DePoy. “If the discount rate remains unchanged and the regulator makes it clear in its commentary that it could be raised again, markets can expect a global correction.”
Igor Orlov, Sergey Kartintsev, Vitaly Gaidaev
All the Article in Russian as of Oct. 15, 2007
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