Russian index up 75% this year
Russia is becoming a market that people can't ignore any more. The upgrade is a recognition of Russia's recovery - systemic risk is massively reduced.
Oct 20, 2003
Five years after its financial crisis, Russia has become a stock market to be reckoned with.
This month, the country's equities broke through pre-crisis levels for the first time, and the government's newly-won status as an investment grade borrower has left investors positively buzzing.
"Russia is becoming a market that people can't ignore any more," says Philip Poole, head of emerging market research at ING Financial Markets in London. "The upgrade is a recognition of Russia's recovery - systemic risk is massively reduced."
The historic move up from junk grade by Moody's Investors Service opens the markets to a new class of investor, even though rival agencies are yet to award Russia this status.
Moreover, BP's $6.75bn (?4bn) deal with Tyumen Oil Company is putting the country on the map for foreign direct investment.
These developments could help share prices add to their already spectacular gains. The RTS1 stock index has risen about 75 per cent this year, making Russia one of the world's best performing markets. Since the lows after the 1998 crisis, the index has risen by nearly 1,600 per cent.
The revival has been fuelled by the country's rapidly rising hydrocarbon revenues. As world prices for oil have jumped from an average of $12.80 per barrel in 1998 to about $28.70 this year, Russian producers have cranked up output from 6.1m barrels a day to 8.7m. This makes Russia the world's second biggest oil exporter after Saudi Arabia.
These favourable trends have coincided with increased domestic stability under President Vladimir Putin, whose policies have helped turn around the state budget from deficits to hefty surpluses.
Relative calm in and around the Kremlin has allowed the owners of Russian companies to focus on making a profit instead of stripping assets and taking the proceeds offshore. The drive to increase asset prices has prompted improvements in corporate transparency, although adherence to international standards is far from the norm.
Oleg Biryulov, who runs JP Morgan Fleming's Russia Securities Fund, says Russia has evolved from a rudderless ex- superpower to a well-managed economy. "There is a clear business plan for Russia Inc, which there wasn't five years ago," he says.
JP Morgan's ?94m fund specialising in Russian equities, whose own shares are listed on the London Stock Exchange, has nearly doubled in value since its listing last December. Since its launch nine years ago - the fund is a successor to the Fleming Russia Securities Fund - the value of net assets has quadrupled.
Other Russian equity funds include the Templeton Russia Fund, the Baring New Russia Fund and the Russian Investment Company run by F&C Management. Most analysts recommend investing in funds rather than individual stocks because it spreads risk.
Given Russia's idiosyncracies, many among the country's top-tier companies remain virtually unpenetrable to individual investors. For instance, state-controlled Gazprom is a sprawling company that often appears to serve some ill-defined political interests.
But the numbers are compelling: Gazprom accounts for about one-fifth of global natural gas supply. Provided that Russia's domestic gas prices are liberalised and Gazprom's dual share structure is abolished, it could become the world's biggest emerging market stock over the next five years, says Chris Weafer, strategist at Moscow-based Alfa Bank. "It controls about 35 per cent of world reserves, and it's much better placed to feed the world's most energy-hungry regions than the Middle East."
Gazprom's American Depositary Receipts, each of which equals 10 rouble shares, have this year risen 127 per cent to $26.60. The rouble stock, unavailable to foreign entities, is up some 88 per cent in dollar terms at Rbs43.7.
Other Russian foreign-traded shares include power utility UES and mining company Norilsk Nickel, as well as telecoms operators Vimpelcom, Golden Telecom and Mobile Tele Systems (MTS).
But availability remains skewed towards the oil sector. Stocks on offer include Sibneft - which is about to be taken over by rival Yukos - Lukoil, Surgutneftegaz and Tatneft.
But oil producers make up 70 per cent of the domestic RTS1 index, and the lack of diversity is a worry to investors. This leaves the Russian market highly dependent on oil prices.
Russian initial public offerings are so far conspicuous by their absence and the market's free float is declining, making investment opportunities scarce.
With the financial system awash with oil money and the government's credit rating upgrade likely to increase capital flows into Russia, there is a risk of another asset bubble.
"The investment grade rating makes the supply-and-demand situation worse," says Weafer. "IPOs [flotations] are likely to be delayed because owner-managers of businesses can now access debt capital at attractive rates and postpone equity financing."
Potential IPO plans are in any case likely to be on ice until after Russia's parliamentary and presidential elections, due in December and March respectively.
Jasper Crone, fund manager at F&C, says: "We are a bit edgy that the market has come so far so fast. But we remain very enthusiastic in the long term."
By Paivi Munter, The Financial Times
This month, the country's equities broke through pre-crisis levels for the first time, and the government's newly-won status as an investment grade borrower has left investors positively buzzing.
"Russia is becoming a market that people can't ignore any more," says Philip Poole, head of emerging market research at ING Financial Markets in London. "The upgrade is a recognition of Russia's recovery - systemic risk is massively reduced."
The historic move up from junk grade by Moody's Investors Service opens the markets to a new class of investor, even though rival agencies are yet to award Russia this status.
Moreover, BP's $6.75bn (?4bn) deal with Tyumen Oil Company is putting the country on the map for foreign direct investment.
These developments could help share prices add to their already spectacular gains. The RTS1 stock index has risen about 75 per cent this year, making Russia one of the world's best performing markets. Since the lows after the 1998 crisis, the index has risen by nearly 1,600 per cent.
The revival has been fuelled by the country's rapidly rising hydrocarbon revenues. As world prices for oil have jumped from an average of $12.80 per barrel in 1998 to about $28.70 this year, Russian producers have cranked up output from 6.1m barrels a day to 8.7m. This makes Russia the world's second biggest oil exporter after Saudi Arabia.
These favourable trends have coincided with increased domestic stability under President Vladimir Putin, whose policies have helped turn around the state budget from deficits to hefty surpluses.
Relative calm in and around the Kremlin has allowed the owners of Russian companies to focus on making a profit instead of stripping assets and taking the proceeds offshore. The drive to increase asset prices has prompted improvements in corporate transparency, although adherence to international standards is far from the norm.
Oleg Biryulov, who runs JP Morgan Fleming's Russia Securities Fund, says Russia has evolved from a rudderless ex- superpower to a well-managed economy. "There is a clear business plan for Russia Inc, which there wasn't five years ago," he says.
JP Morgan's ?94m fund specialising in Russian equities, whose own shares are listed on the London Stock Exchange, has nearly doubled in value since its listing last December. Since its launch nine years ago - the fund is a successor to the Fleming Russia Securities Fund - the value of net assets has quadrupled.
Other Russian equity funds include the Templeton Russia Fund, the Baring New Russia Fund and the Russian Investment Company run by F&C Management. Most analysts recommend investing in funds rather than individual stocks because it spreads risk.
Given Russia's idiosyncracies, many among the country's top-tier companies remain virtually unpenetrable to individual investors. For instance, state-controlled Gazprom is a sprawling company that often appears to serve some ill-defined political interests.
But the numbers are compelling: Gazprom accounts for about one-fifth of global natural gas supply. Provided that Russia's domestic gas prices are liberalised and Gazprom's dual share structure is abolished, it could become the world's biggest emerging market stock over the next five years, says Chris Weafer, strategist at Moscow-based Alfa Bank. "It controls about 35 per cent of world reserves, and it's much better placed to feed the world's most energy-hungry regions than the Middle East."
Gazprom's American Depositary Receipts, each of which equals 10 rouble shares, have this year risen 127 per cent to $26.60. The rouble stock, unavailable to foreign entities, is up some 88 per cent in dollar terms at Rbs43.7.
Other Russian foreign-traded shares include power utility UES and mining company Norilsk Nickel, as well as telecoms operators Vimpelcom, Golden Telecom and Mobile Tele Systems (MTS).
But availability remains skewed towards the oil sector. Stocks on offer include Sibneft - which is about to be taken over by rival Yukos - Lukoil, Surgutneftegaz and Tatneft.
But oil producers make up 70 per cent of the domestic RTS1 index, and the lack of diversity is a worry to investors. This leaves the Russian market highly dependent on oil prices.
Russian initial public offerings are so far conspicuous by their absence and the market's free float is declining, making investment opportunities scarce.
With the financial system awash with oil money and the government's credit rating upgrade likely to increase capital flows into Russia, there is a risk of another asset bubble.
"The investment grade rating makes the supply-and-demand situation worse," says Weafer. "IPOs [flotations] are likely to be delayed because owner-managers of businesses can now access debt capital at attractive rates and postpone equity financing."
Potential IPO plans are in any case likely to be on ice until after Russia's parliamentary and presidential elections, due in December and March respectively.
Jasper Crone, fund manager at F&C, says: "We are a bit edgy that the market has come so far so fast. But we remain very enthusiastic in the long term."
By Paivi Munter, The Financial Times