Sergey Glandin on the possibility of further sanctions against the RF

In November the MOEX Russia index passed 3,000 points, setting a new record high. In the US each S&P 500 record is celebrated almost like a national holiday. Perhaps we will adopt this tradition. The Russian market is experiencing a boom of private investors. In the nearest future the stock market may grow by 15-20% of the current levels. The Bell found out how long the growth will continue and what can stop it.

What happened

Commenting on MICEX's record, Sberbank’s chief strategist Cole Akeson called the Russian stock market the most profitable in the world. Is it really so? If someone invested 500,000 rubles into the Russian stock market in January 2019, by November they would have received 125,000 rubles of return, i. e. 25%, as calculated by independent financial consultant Natalya Smirnova at the Bell's request. And taking into account total return including dividends, they could have earned all 40%, as calculated by Akeson. The growth rates are colossal.

We looked at the reasons of euphoria at the Russian stock market in detail here and here. For reference: the American S&P 500 index grew 19% over the first three quarters of 2019, and average dividend yield of companies listed on it is below 2%.

Well-off Russians have massively rushed to trade stocks. Mutual funds demonstrate excessively low yield and trustees have excessively high barriers to entry, Head of MOEX Supervisory Board Oleg Vyugin explains their activity.

Over nine months of 2019 the number of unique clients of Moscow Exchange grew by 93% compared to December 2018, and before that maximum annual growth had amounted to only 23%. Almost 40% of private investor accounts are Individual Investment Accounts (read about how they work here). A year ago their share amounted to 35%.

Major growth was actually ensured by three brokers: Tinkoff Bank (the number of accounts grew by 242% over a year), Sberbank (+91%) and VTB (+72%). They also make the top 3 by the number of clients. A burst of investors from Tinkoff Bank may be explained by colossal promotion spending: according to Adinex’s estimates, last year the bank spent 6 bn rules on it, which is 30% more than in 2017.

With ‘ordinary’ people coming to the market the investor’s profile changes: their average account has 1.6 mn rubles (against 2 mn a year earlier), their account is set up remotely. Almost 90% of company clients, who hold 90% of new accounts, set them up using the remote option.

There is room for growth. As of October 2019 private investors accounted for a little over 3.3 mn, i.e. 2.2% of the population. At the same time the share of active investors (who effect at least one operation per month) amounted to 8–9.5%. They account for about 34% of the total traded stock value. For reference: in the US 55% of citizens holds stocks, according to Gallup survey. The growth of the Russian market is inhibited by two main factors: still a low level of financial literacy and poverty.

Not only Russians

Interestingly, neither the crisis of 2014 nor tense relations with the West scared foreign investors away from the Russian market. Just the other way around, since 2012 their number has grown almost seven-fold: up to 13,000 unique investors. The investors are mostly corporate.

American ones are especially active. In the second quarter of 2019 the total amount of their investments amounted to $79.3 bn. That is almost a half of the total market capitalization. Since 2015 growth has amounted to 58%.

The amount of European investments is declining, but that may have something to do with the fact that many invest through American funds, analysts explained to the Bell.

How long the euphoria will last

Five analysts interviewed by The Bell agree that the market will continue to grow and refer to the same corridor: 15-20% of the current levels.

To estimate total return we can add another 6%, which is the average dividend yield of the Russian stock market, and it is unlikely for it to decrease next year: since the Ministry of Finance requires high dividends from companies and they do not look to invest into new projects, Head of Trade Operations Department of Freedom Finance Investment company Igor Klyushnev says. The same forecast of dividend return next year is given by Oleg Vyugin of MOEX’s Supervisory Board.

The Russian market is currently worth much less than it should be, Financial Market Analysis and Macroeconomics Director of Alfa-Capital Managing Company Vladimir Bragin says.

The market is not overheated and is not expected to be in the near future, Head of Stock Management Department of Otkrytie Managing Company told the Bell.

What’s next

The market may crash, for instance, under new tough sanctions. It can plunge 20% at a time, assumes Investment Manager of Otkrytie Broker Timur Nigmatullin. What is the likelihood of such sanctions being introduced?

The risk that sanctions are to be introduced by the US in the near future is lower than in 2015–2017. Before the 2020 election there cannot be a single opinion with regard to sanctions, Deputy Director of the Centre for Comprehensive European and International Studies of HSE Anastasia Likhacheva claims. As of the beginning of this year both US chambers introduced a total of seven bills, but none of them have become a law, Council of Pen & Paper Attorneys at Law Sergey Glandin reminded the Bell. The likelihood of at least one of them (for instance, the Protecting Europe's Energy Security Act) becoming law is close to zero, Mr. Glandin says. OFAC of the US Treasury could include some high-profile Russians in an existing sanctions list. But according to Mr. Glandin, OFAC is now primarily busy with Iran.

50/50 for Britain. Being an EU member Britain is not entitled to have its own sanctions policy, and after Brexit it will be engulfed in domestic problems, and is unlikely to have time for serious anti-Russian measures, Anastasia Likhacheva believes. But Mr. Glandin of Pen & Paper does not agree: Britain already has necessary documents to introduce sanctions against Russia, and after Brexit (the new deadline is the end of 2020) they may be adopted and they will fit in with the general trend of fighting ‘dirty’ money, Mr. Glandin believes.

A much more serious danger for the Russian market is the global trade war, Anastasia Likhacheva says. It fits in much better with Trump's election campaign, in combination with the idea to create jobs for ordinary Americans. Escalation is possible, but unpredictable, there is no precise procedure, unlike with the sanctions.

The Russian market looks attractive at this moment. In the long run, however, it’s not all that clear. Formally if a person invested 500,000 rubles into Russian securities in 1997, they would have increased their capital 30-fold over 22 years. But in 1998 ruble’s denomination happened: it lost its value to dollar approximately 10-fold. I.e. in reality the capital of our state has only grown three-fold, and the actual growth amounted to 13–14% annually. That only slightly exceeds S&P 500’s return. At the same time risks in Russia are certainly higher, Natalya Smirnova concludes.

Due to ruble’s denomination PTC index (calculated almost the same way as MOEX’s index, but in dollars) better reflects the economic situation, Smirnova adds. It accounts for denomination of ruble to dollar, which means it more accurately reflects what foreign component goods and foreign spending may be covered by the earned money.

Vladimir Bragin of Alfa-Capital says that the reference index should be picked according to the investment horizon: those who bought their assets long ago use PTC. But those who invested into stocks in recent years refer to MICEX, as ruble is not as volatile as it used to be.

Anastasia Stogney