Russia more attractive for investors post Brexit

The S&P Global Broad Market Index fell by 6.9 percent after the Brexit referendum.

The S&P Global Broad Market Index fell by 6.9 percent after the Brexit referendum.

Rex/Fotodom
Britain’s decision to leave the European Union has unexpectedly shown how sturdy the Russian economy is when confronted with global shocks. After heavy capital outflows in previous years and Western sanctions, the Russian market is now a "paradise for investors."

Events which unfolded in markets across the world in the wake of the June 23 referendum in Britain,  which saw a vote to leave the European Union, have shown that Russia, along with a few other countries, is more immune to international shocks than other players.

"It's a rare case when everything is bad in the world but in Russia this situation has not led to anything negative,” said Alexei Bachurin, chief trader at Renaissance Capital. “Russian state bonds have not fallen and shares are still in the same range, even if they are closer to the lower edge. And the ruble is rather strong.”

Meanwhile, Bloomberg writes that Russia, along with the other developing markets, has become a new "paradise for investors.

A heavenly place

According to the Financial Times, in two days of trading after the Eurosceptics' victory in the Brexit referendum, world capital markets lost $3 trillion, out of which developed markets lost $2.8 trillion. The S&P Global Broad Market Index fell by 6.9 percent after the vote.

This is the heaviest two-day fall since the collapse sparked by the financial crisis in November 2008. The S&P Dow Jones Indices indicates it was the 12th-largest collapse in the company's history. In two days, the S&P 500 lost almost $1 trillion, a fall that was the third-largest in history in cost equivalents.

On the Moscow Stock Exchange, however, trading on Friday, June 24 opened with the MMVB decreasing by 3.28 percent (to 1856.3 points), but, by the end of the day, there was a partial recovery. On Tuesday, June 28, the index began to rise (by the end of trading it had risen 0.84 percent to 1857.23 points). 

Tuesday's rise in the value of Russian securities was also observed on the London Stock Exchange: Lukoil securities rose 1.25 percent and Novatek’s increased 1.27 percent.

The same situation was seen in debt markets. The state bond index in the Moscow Stock Exchange rose 0.2 percent on June 28 and corporate bonds rose 0.08 percent.

A more pronounced price growth was seen in sovereign Eurobonds, which rose an average of 1-1.5 points from June 27 to 29. Cost of Russia-23 securities rose from 106.5 to 108.3 percent and the price of Russia-26 securities increased more than one point, reaching 102.38 percent.

Long-term Eurobonds are also showing a rise.The yield on Russia-42 bonds decreased to a two-year minimum of 4.88 percent annually.

Western sanctions have helped Russia adapt and reduce its dependence on American and European banks, since the country has no access to them, explained Yan Dehn, head of the research department at Ashmore Group.

Analysts at Sberbank CIB agree: "If the market's fluctuations on Friday point to anything, it is primarily to the protective capacities that the Russian market acquired after the beginning of the Ukrainian crisis," said a source from the investment bank.

This is mostly conditioned by the large-scale capital outflow that occurred after the crisis, and the decreasing dependence on foreign loans. The sanctions regime, which limited investors' interest in Russian assets, partly saved Russia from the current turbulence, explain Sberbank CIB analysts.

And the consequences of Brexit may even be positive for Russia, they believe. Britain’s departure could lead to a split among European countries over sanctions against Russia, meaning they could consequently be softened.

Less risk

Experts also link the rise in prices of Russian securities to heightened attention from investors, who are trying to take their investments out of British and European assets and place them into more reliable instruments.

"The worry brought about by the UK referendum led to the sale on Monday, June 27 of British and risky assets, and investors preferred to invest them in protected instruments," wrote Sberbank CIB analyst Alexander Golynsky in his review on June 28. He observed that investors were actively trading Russian Eurobonds.

"In the current situation, developed markets may appear riskier for investment since, in the last several years, they've demonstrated significant growth. Investors fear that in the event of more shocks in Europe, the markets may substantially decline," said Yaroslav Podsevatkin, head of trading at Aton.

Investors have concentrated mostly on the Eurozone's problems and, from this point of view, Russia and other developing markets are now more interesting for investment.

Investor interest in Russia is primarily related to the low cost of assets.

"In 2014 the prices of Russian shares were also low but no one was interested in them because investors did not see any potential in the economy," said Podsevatkin. "Now the economy is recovering, inflation is declining, oil prices are stable and there is the potential that the sanctions will be softened."

Finally, he explained, investors are attracted by the high profitability of Russian shares: "Large foundations and banks are starting to gradually buy Russian securities. This is not a lot of money but it is enough to raise our indices," he said.

Another reason for the stability of the Russian market is oil prices. By midday on June 29 the cost of Brent crude had increased by 0.6 percent to $48.37.

Consequently the ruble strengthened against the euro and dollar (on the Moscow Stock Exchange at 7:00 p.m. Moscow time on June 29, the dollar cost 64.52 rubles, having declined since trading began by 93 kopeks, while the euro was trading at 71.33 rubles).

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