Foreign Investors Hope Russian Market to Move from Recovery to Growth

By Marina Romanova

Foreign investment inflow in Russian stock in 2016 showed first positive annual result since 2012 and has exceeded US$727 million, according to the Citibank, which based its calculation on the Emerging Portfolio Fund Research (EPFR) data. In 2012 foreign investors injected US$410 million in Russian assets. The last year results are also a record high since 2010, when foreign investments were amounted to US$3.3 billion.

Russian stocks were up 16 percent since November, 8th, 2016 based on the performance of the RSX Van Eck Vectors Russia ETF (U.S. first exchange-traded fund focused on Russia), while the other emerging markets are down 6 percent collectively, as measured by the iShares MSCI Emerging Markets ETF EEM.

Overall there were about US$1 billion invested into emerging stock markets in 2016 and the bulk of that inflow went to the Russian stocks.

According to the Bank of Russia, the entire increase in the Federal loan bonds (OFZ) market in January–September 2016 was driven by investment of non-residents. While the last surge of interest was observed in the fall of 2016 when Russian stock attracted up to US$110 million. If in September and October the share of non-residents accounted for 20 percent of the outstanding OFZ, in November it rose up to 38 percent.

Foreign portfolio investors’ ongoing interest in the Russian market improved RTI (Russian stock index) to its record high. As Russian business daily Kommersant reports, at the beginning of the year the stock market index was at 23.7 percent, but by the end of 2016 it has rallied by 52 percent in dollar terms since the start of the year.

According to the Bloomberg, Russian stock market demonstrating one of the best results among stock indexes in developed and developing countries. Among Russia’s closest economic and political allies and members of the Eurasian Economic Union only Kazakhstan’s stock index grew more – by 59.95 percent.

The country’s other main index — Micex — has shot up by 27 percent. It’s denominated in rubles. In one of its analysis, Bloomberg score Russian currency as a number one among the world best spot returns.

“When it comes to currencies issued by governments and central banks,” Bloomberg article reads, “the Russian ruble has been the best performer of the year as the oil market rebounded.” Russia’s ruble advanced 1.6 percent, one of the top two performers among 31 major world currencies after sliding below 60 per dollar for the first time since July 2015.

International and national market observers agreed on two facts that had a positive effect on Russian stocks. First is OPEC’s agreement to curtail oil output that OPEC reached in November 2016 with Russia and some other nonmembers, which pushed crude prices higher. Russian government, for instance, agreed to reduce country oil production by 300,000 barrels per day.

“The bounce in the oil price has supported the Russian economy and saved it from disaster,” Naeem Aslam, chief analyst at Think Markets in London, quoted by the CNN as saying. Shares of Russian oil giant Gazprom were up 12 percent in November 2016, while shares of Lukoil have gained 15 percent. Rosneft’s stock was up 20 percent after Glencore and Qatar teamed up to pay US$11 billion for a stake in state-run oil firm Rosneft, confirming Russia’s allure for international investors.

The recent surge in oil prices is a factor in Russia’s stock market rally, but so is Donald Trump’s unexpected victory. As CNN Money phrased it, Russian stocks are getting a Trump bump when global investors rushed into Russia following the U.S. election because they expect president-elect to help thaw frosty relations between the two nations.

”More money poured into Russian stock mutual funds last week (week after presidential election in the United States) than at any point in almost six years,” according to fund tracking firm EPFR Global.

Market participants estimate that the foreign investment inflow in Russia will continue in 2017. At least this is what is expected before Donald Trump’s inauguration as the new president of the United States in January 2017. After that “investor behavior will depend on whether or not real convergence between Russia and the U.S. actually takes place,” the Russia Beyond the Headlines speculates.

“I like Russia for some very simple reasons: The most obvious reason is Trump, because sanctions will be lifted,” Luca Paolini, chief strategist at Pictet Asset Management, said to the Reuters.

“But it is a little more complicated than that. It is one of the few emerging markets where we feel it is cyclical… where we think there is some decent potential in almost every scenario.”

Russia is favored by bond investors too because falling inflation may bring 150-200 basis points in official interest rate cuts next year. During last year Russian Ministry of Finance floated US$3 billion worth of bonds. The first flotation worth US$1.75 billion took place in May 2016 followed by another one in September 2016. There was no domestic demand, so the government offered bonds to foreign investors specifically. Both times the order book exceeded US$7 billion, with buyers coming from the UK, the U.S., and Asia.

Furthermore, data showed manufacturing expanding in December 2016 at its fastest pace since March 2011, a signal that the economy is starting to grow again.

Prices for oil will average US$57 a barrel, according to analysts’ forecasts in Reuters polls, US$10 higher than in 2016. And if the central bank brings inflation down to its 4 percent target, ordinary Russians should have more money to spend.

But some are remain rather skeptical. Russia still scores poorly on all measures of corruption and transparency, Reuters article reads, its fortunes remain tied to oil exports and a recent report by the anti-monopoly service found state ownership of the economy had doubled since 2005 to 70 percent.