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bne July 2018 Eastern Europe I 43
short positions. BCS has a 25% share of the turnover on MOEX, the largest bro- ker by far. Our discussions with clients and investors tell us that people are shifting from the bond market into the equity market and looking for yield. And the dividend story is still strong. Russia is yielding close to 5%, which is more than double the level of the benchmark MSCI EM Index. Plus you can get a handful of stocks – some 10 stocks – that our analysts recommend as Hold or Buy with a strong fundamental case, but the yields over the coming years are expected to be 6%-plus.”
“BCS Dividend basket has the top five dividend earners in Russia. The average yield is never less than 9%. We are talking about stocks like Norilsk Nickel, Severstal or Novolipetsk Metallurgical Kombinat (NLMK), which yield in excess of 10% and if you take into account the weak ruble and market to market then the real yields are closer to 15%. We
Vyacheslav Smolyaninov,
chief strategist
and deputy head
of research at
BSC Global Markets
realise fully that it was also a result of the disinflation over the last three years. So yield matters,” adds Smolyaninov.
“The average investor has many different products into which they can put money – including bank deposits. The long position of our investor in Russian stocks has been on the rise for most of this year. I have to give kudos for them for cutting those positions
in January, due to the sell off in EM markets. Now they are picking up again,” says Smolyaninov.
“In general, our clients, including large Russian asset management companies, if there is no dramatic shake up of the market, no shocks, we expect $3bn-$5bn of Russian money that is now under
the mattresses or in bank deposits to be hitting their various products in the Rus- sian financial market with a focus on list- ed Russian securities – both bonds and stocks,” says Smolyaninov. “The reality
is that Russia, like other EM markets,
is driven by international flows. To say that Russia has developed a domestic investor base that can hold instruments, irrespective of if the weather is good
or bad outside, that has not happened. Things have improved, but the game has not been changed.”
The government is playing its part in developing the financial markets and encouraging the population to invest for their old age. The mattress money pool is huge, but largely unavailable to the economy, so the state has introduced various incentives to coax this cash
out into the light of day. Investment accounts and “people’s bonds” are two of the biggest schemes to date.
“The investment account is a government initiative to give a tax break for people who invest from three years on who invest at least $7,000 per year. That has attracted
the equity market has started to attract money too. This year has seen a sell off of emerging markets in general and Rus- sia was hit by a double whammy as there was a bout of selling following the April 6 round of sanctions as well.
“The EM got a little ahead of themselves at the start of this year. US rates were being driven higher and the weakest EM markets – Argentina, Turkey and maybe Brazil – were hit. But it has been overdone. We will muddle through with heightened volatility to the end of the year,” Smolyaninov adds.
“Our discussions with clients make
it clear that people see a difference between Russian bonds and stocks.
The attraction of the stocks is superior growth and Russia has issues with that for the time being: the consensus is 2% growth this year and next year, while the other EMs are growing faster than the
“Russia is yielding close to 5%, which is more than double the level of the benchmark MSCI EM Index”
people into various instruments. You can invest in bonds, stocks, most listed prod- ucts out there,” says Smolyaninov.
“There have been few examples of the people’s bond. It has been successful, but to say that it is a product that is taking off is a bit early,” says Smolyani- nov. “We see an increasing number of those bonds being placed. So far the central bank and state banks that are placing them are testing the water. It’s like trying to learn a bicycle by riding a tricycle first. They are precisely targeting an audience that is new to the financial market. It is not the classic investors that we were talking about before.”
Russia’s capital markets are coming back to life. The bond market has become an investors’ favourite in the last few years thanks to the high yields, rock solid macro fundamentals and weak currency that has created the conditions for a very attractive carry trade. But more recently
global average,” says Smolyaninov. “However, for the bond investors the situation can’t be better. Very high oil prices and a weak ruble only help the budget. The ability and willingness of the Russian government to fulfil its international debt obligations are not in question,” says Smolyaninov.
The extra cash also means the Kremlin can pay for its giant spending pro- gramme. However, Smolyaninov says: “The devil is in going to be in the details. We need to see the details of the plan before we can work out what its effect on GDP will be.”
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