Page 60 - IFR Opportunities in Russian capital markets

CHAPTER03
ifrintelligence reports/Opportunities in: Russian Capital Markets
International investment flows into Russian equity
The flows of international investment into the Russian market have been rising steadily in the last two years, as the nearly doubling of the market for three years in a row attracted more and more attention. However, of the BRIC countries, Russia has attracted the least attention.
Russia was classed as one of the BRIC (Brazil, Russia, India, China) countries by Jim O’Neill, an economist with investment bank Goldman Sachs, who coined the term BRIC in 2003. He calculated that the Chinese economy could overtake Germany and Britain in four years in US dollar terms.
But of the four, Russia suffers from a consistently bad press that fails to acknowledge much of the progress that has been made over the last five years, especially in the financial sector. It has outperformed all the other BRIC countries for several years, although both China and India did better in 2006.
Likewise, over the last six years Russia's stock market outperformed the global emerging market index as well as the price of oil, which conventional wisdom says is the main driver of the market. See Table 3.16 and also ‘The effect of oil on liquidity’ below.
Table 3.16: RTS, GEM and oil price performance, 2000-06 (%)
RTS GEM Oil-Brent
2000 –18.2 –31.9 –13.0
2001 81.5 –4.8 –11.7
2002 38.1 –8.0 51.7
2003 58.0 51.7 0.0
2004 8.3 22.4 33.4
2005 83.3 33.3 51.9
2006* 57.8 23.7 10.0
Note: *2006 year to close on November 30
Source: DataStream
The international investment inflows peaked at the start of 2006 when retail investors in America joined the party, but have fallen substantially since the global markets were routed in May 2006 by fears of US interest rate hikes, and have not really recovered.
Since the price of oil peaked in August 2006, the flow of new money into Russian dedicated equity funds has slowed markedly and portfolio managers have stopped increasing their weighting in Russia with new money.
The increase in the weighting with GEM is due to the market performance in December 2006, when Russian equities outperformed the GEM average by a factor of two.
Looking at the trends in the flows into funds that report investment movements on a weekly basis (see Table 3.17), in 2006 the allocation of new money to country-specific funds within the BRIC category of countries was 7.4% into Russia. That was the lowest allocation within this category. In November and December, the new allocations were relatively small, and in January 2007 the net total taken into Russia-dedicated funds was only US$22.3m. Most of the fresh inflows into the BRIC countries in 2006 and the first few months of 2007 went to India and China – the ‘it’ GEMs.
53