Investors are losing their appetite for risk

Strategic investors have adopted a wait-and-see attitude, not hurrying to choose a long-term strategy. A number of factors suggest that the global economy, and Russia in particular, has withstood the storm and is beginning to recover.

While investors have taken this into account, more specific signs are required - for example, steady GDP growth, stabilising employment, and increasing production - to support the rally.

There is enough cash to fuel growth, especially in the West, where more loans were issued, and discount rates are lower. There is no shortage of attractive investment opportunities, but the risk is still high. In Russia, economic growth is also hampered by fears of banking sector problems. Heightened risk is due to the fact that banks have not yet fully recovered from the crisis. Hit by shrinking demand, many corporate borrowers have been unable to repay their loans and have had to sell collateral to settle their debts. The level of non-performing loans is quite high and this autumn we should see which banks can cope with the burden of bad debts and which will collapse.

As the crisis unfolded, loan rates rocketed to 20-25pc or more. Despite such high rates, in the first half of the year banks and financial companies found it much more beneficial to invest in fixed-income instruments than lend to companies. In some cases, annual yields on bonds and Eurobonds reached 30pc in foreign currency. Even bank bond yields rose to 60pc. At one point, Russian Standard's bonds offered a yield of 100pc per annum.

In such a situation, it made more sense to invest in fixed-income securities. The paradox was that by lending to companies, banks earned less while assuming more risk.

Now bond returns have fallen sharply - decreasing by 50-65pc for bonds and Eurobonds - making lending a more lucrative business. In other words, the situation seems to have stabilised and there are funds available for investment. If investors decide corporate lending is a good business, given the risk/return ratio, rates will be going down.

For this to happen, companies must show they have learnt to deal with the crisis, finding customers despite falling demand.

The situation in the banking sector is further complicated by the fact that bad debts are undermining capital adequacy ratios. To raise their capital adequacy to mandatory levels, banks will either have to write off such debts or add more capital. All this could create new problems in the banking sector.

Problems will probably not reach the scale of the 1998 default. That could only happen if oil prices dropped to $20 a barrel. But with oil prices hovering at $70 a barrel and the West showing signs of economic recovery, such pessimistic scenarios are unlikely.

Among the most interesting aspects of the crisis is the change in consumer demand for financial products. Last year there were many investors willing to take risks. They were investing in equities, including in Western companies, and also in mutual funds. Few investors opted for lower risk fixed-income securities: some players not only invested all their savings, but even borrowed to invest in equities.

Now, in a U-turn, the number of risk-loving investors has decreased.

Today demand is rising for savings products, including gold, hard currency and structured products. Clients are seeking protection against inflation and devaluation. Strange as it may seem, the number of clients increased during the recession, with interest in investment and savings products growing.

People are beginning to appreciate the opportunities offered by equities, and the average investment of private individuals putting their money into mutual funds is around 350,000 roubles ($11,500).

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