Page 72 - IFR Opportunities in Russian capital markets

CHAPTER03
ifrintelligence reports/Opportunities in: Russian Capital Markets
Foreign capital inflows
Another source of fresh capital arrives indirectly via the burgeoning foreign investment market.
Russia has been a net exporter of capital for almost all of the last decade, but 2006 saw a boom in foreign direct investment (FDI), as shown in Figure 3.12.
At the end of January 2007 Russia's Finance Minister, Alexei Kudrin, reported that Russia's net capital inflow soared to US$41.6bn from US$1.1bn in 2005, which was the first year of positive inflows since the fall of the Soviet Union in 1991.
In 2007 inflows will moderate, says Kudrin, but the Ministry of Finance is still expecting net inflows of capital to top US$15bn. Moreover, the CBR Governor, Sergei Ignatyev, says there is plenty of room to surprise on the upside as the state is organising at least two big share placements – VTB and Sberbank – that could bring in this amount by themselves.
Figure 3.12: Russian net private capital inflows, 1998 - 3Q2006 (US$bn)
30 20 10
0 –10 –20 –30
1998
By banks
By non-banks Total
1999 2000 2001 2002
2003 2004 2005 3Q06
Source: CBR
Domestic consumption
Much of the turmoil on the international equity capital markets is being driven by fears of a slowdown of the US economy, but one unanswered question is to what extent consumer consumption in the emerging markets of India, China and Russia will compensate for the possible American recession.
While the consensus is that these markets – individually or combined – are not big enough to compensate for an anaemic US, they have become big enough to cushion the blow. To what extent domestic consumption has immunised Russia's stock market against external shocks remains moot.
Deutsche Bank's Asian economists argue that, while Asian demand is not yet big enough to outweigh a US recession, it is enough to keep commodity prices in the mid-cycle range. And with over US1trn in hard currency reserves, China's appetite for commodities will continue for the meantime. Russia is in a similar position, with over US$300bn in reserves which will buffer the economy from a slow down in the outside world.
Portfolio investors certainly believe that the consumer story offers some protection from a cooling of the global economy. Following the sell-off in May 2006, portfolio investors switched en masse out of traditional commodity stocks and into consumer-oriented stocks in the belief that the consumer spending locomotive has a lot further to run on the back of rising consumer credits. Figure 3.13 shows the most recent stock market trends.
Alfa Bank is typical of the banks in that it adjusted its model portfolio to favour more consumer- oriented stocks, while maintaining a position in Russia's strongest suits of raw materials. Alfa Bank decreased its weighting of blue chips oil and metal companies in its model portfolio for 2007 from 60% to 50% and increased its weighting of mid-cap companies – mostly consumer-oriented – to 40% from 30%, but it has maintained the small-cap, low-liquidity companies share at 10%.
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