22.05.2022
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What is happening in the Russian capital market? 04/21/2022

False market movement

Strength – in truth, and specifically for the Russian stock market, it is not very pleasant now, but in many respects it explains the quite predictable dynamics. In fact, since the beginning of the resumption of trading in shares on the Moscow Exchange on March 24, we have observed a false movement based on unjustified expectations. After reaching a local peak on April 4 (+8% since March 24), the stock market is going downhill and has already lost 17%, dropping to the levels of February 25, 13% short of the minimum value of February 24 (the beginning of the special operation in Ukraine), or a local minimum August 2018

Since the resumption of trading, the main sales were in the oil and gas sector and banks (they sold the most liquid securities, partly due to delisting), the main growth was in retail (Magnit, Fix Price) and communication companies (VK).

The average trading volume for shares on the Moscow Exchange over the past week amounted to 27 billion rubles. per day against 50 billion rubles. the day immediately after opening. After systemically important credit institutions (SICIs)/banks (due to easing from the Central Bank in terms of fixing the book value) bought back shares for 46 billion rubles in March, after that, since April, individuals have been the main activity in trading. This explains the drop in trading volume and the dynamics of shares, not supported by specific investment ideas. According to the Moscow Exchange, the number of unique accounts has grown to 19 million (26.3% of the active population of the country and 13% of the total population). In the United States, 40% of the equity market of individuals participate directly in trading, and 60% through institutional funds. At the same time, local and international funds traditionally accounted for the bulk of trade on the Russian market. Local funds, incl. UK and NPF, look at the stock market negatively.

The main reason for the negative view on the stock market is a low planning horizon, a significant reduction in operating flows for export-oriented companies, and uncertainty about the ruble exchange rate, which significantly increases the risks of investing in companies focused on the local market. The potential overhang of shares after the conversion of GDRs into shares adds to the negative. The overhang from the sale by residents of receipts of Russian companies after delisting and by non-residents of local shares (if the ban is lifted) may exceed $60 billion (4,500 billion rubles), or 14% of the current market capitalization.

Source: ITI Capital, Bloomberg

At the same time, the opposite dynamics is observed in the bond market due to the beginning of the active reduction of the key rate (since April 8), the ruble is generally strengthening against the dollar despite the easing of restrictions on the movement of capital due to low demand for the currency and its limited supply in the banking system.

Other important reasons for the market decline

1. Delisting of Russian shares / sale of securities by residents. From April 27, the law on delisting will come into force – until May 5, 2022, Russian issuers are required to terminate the agreements in accordance with which securities were placed under foreign law, as well as to close programs for the circulation of depositary receipts.

According to our estimates, based on the share of receipts in the capital of companies, their value after being converted into local securities will amount to 9,245 billion rubles, or 27% of the capitalization of the Moscow Exchange. Holders can sell 10% of receipts worth 920 billion rubles. The implementation of such a volume on the market will require considerable time, since the trading volume is only 25-30 billion rubles. per day. This factor explains the reasons for the fall of the most liquid stocks.

2. After the introduction of the February sanctions, the value of the portfolio of Russian shares of foreign funds, including local securities and receipts, fell to $47 billion (3666 billion rubles). Before the sanctions, the total share of non-residents was $200 billion, despite the fact that the market capitalization exceeded $800 billion. Based on the current market capitalization, the share of non-residents, including individuals, can reach a maximum of 5539 billion rubles. ($71 billion). Until the bridge between NSD and Euroclear resumes operation, non-residents will not be able to sell Russian securities.

3. Strengthening sanctions rhetoric

Europe is already preparing another round of sanctions, the sixth, in less than two months. Over the past two weeks, the West has imposed sanctions on the Russian banking sector, including Sberbank and Alfa-Bank, which has led to a redistribution of banking assets and forced sales, including local stocks and bonds.

4. There is increasing rhetoric about the embargo on oil and gas imports from Russia to Europe (this direction accounts for 70% of Russian energy exports). So far, a ban has been introduced on coal imports to Europe from Russia (Russia accounted for 4% of coal imports to Europe in 2021). Energy exports, in particular oil and gas, account for 59% of Russia’s total exports.

5. Lack of corporate motivation. To date, metallurgical companies (NLMK, Severstal, Evraz, MMK and others), retailers (X5, Cherkizovo and others), as well as LSR, Veon, Mosbirzha, Rusagro and Enel Russia have refused to pay dividends. Remains high probability of paying dividends by state-owned exporting companies due to the need to fill the budget. So far, the volume of officially declared dividends has amounted to 293 billion rubles. compared to RUB 4.7 trillion expected before the sanctions. in aggregate at the end of 2021 Cancellation of the payment of dividends or postponement of the decision on them, cancellation of the publication of financial statements is the response of companies to the imposed operational sanctions and the impossibility of paying dividends to their main shareholders. Some companies refuse to pay dividends due to the low predictability of operating flows, limited funding opportunities. In addition, the Central Bank did not recommend banks to pay dividends.

6. Global volatility. The S&P 500 is down more than 3% since early April, the Nasdaq is down more than 7% after recovering in March. We identify three main risks that are not yet fully reflected in the current market quotes. The first is the Fed’s more hawkish approach to monetary policy (MP), the second is recession/geopolitical risks, and the third is China’s coronavirus lockdown. Key risks that global markets do not take into account 04/15/2022 (iticapital.ru)

7. Inevitable technical default. The six largest companies (RZD, Severstal, SUEK, Evrokhim, ChTPZ and Nordgold) are in technical default on external obligations, their grace period for payments has already ended, on May 4 it expires for Russia’s sovereign bonds.

8. Not cheap enough. The capitalization of the Moscow Exchange fell by 42%, from a historical peak (October 2021) of 62 trillion rubles. up to 36 trillion rubles. Losses of Sberbank and VTB under state programs may exceed 600 billion rubles. for 2022 compared to a profit of 1.6 trillion rubles. Last year. Consequently, only export companies remain, whose share in the market structure has grown to 78%, and their fate is curled by the embargo on oil and gas. Retailers are the most vulnerable to rising inflation, and the ability of IT companies to implement import substitution is a big question mark. In addition, growth stocks are under pressure due to the rapid increase in foreign exchange rates.

What’s going on in the bond market?

The “soft” rhetoric of the regulator in recent days has given a powerful impetus to optimism among OFZ market participants. Yield of “classic” issues fell sharply against the backdrop of increased trading volumes; in such a way that almost the entire curve began to approach the value of 10% (the only exception is securities maturing in the next year).

It is also worth noting the sharply reduced negative slope of the sovereign curve, largely caused by investors’ reassessment of interest rates in the medium term. Since the resumption of trading in the third decade of March, the price index of government bonds RGBI, after updating the lows of December 2014, has won back all the fall, returning to the value of 125.5 p.p. (+28% from the bottom reached).

According to our estimates, the yield of government bonds with a constant coupon has long since reached the equilibrium level, taking into account our baseline forecast for the key rate until the end of the year. The current price values ​​seem too overbought to us, so we do not see much interest in forming long positions in the “classic” OFZ at the moment unlike high yield corporate bonds. Moreover, taking into account the expectations of growth in annual inflation in the coming months, real yields will increasingly go into the negative zone, thereby becoming less attractive to investors. In this regard, we continue to give preference to high-quality corporate ruble bonds of first- and second-tier borrowers (see our review of 04/01/2022). As for the public sector, inflationary linkers may be of more interest here, even if their prices have also risen markedly in recent weeks.

What is happening in the foreign exchange market?

Of all Russian assets, the ruble is the most successful, after a pause from April 8 to April 13, the Russian currency continued to strengthen, having risen in price by 35% from the peak level on March 9. The main reason for such dynamics is the sale of foreign currency by exporters against the backdrop of a record inflow of export earnings. Fall in imports due to limited demand from the population due to the limit on cash withdrawals and a reduction in its share in the banking system due to sanctions.

In March, according to the Central Bank, exporters were only able to sell foreign currency in the equivalent of 865 billion rubles. (i.e. $10 billion per month, or $0.5 billion per day), which does not exceed 33% of actual foreign exchange earnings (according to our estimates, foreign exchange earnings from exports amount to $500 billion per year, of which $400 billion are subject to mandatory sale in under the rule of selling 80% of foreign exchange earnings, which is equivalent to selling $1.6 billion per trading day).

Therefore, in fact, exporters sell foreign currency 2.5 times less than the required volume due to the organically low trading volume on the foreign exchange market, which fell to $0.8-1 billion per day compared to export earnings of $1.4 billion per day, of which 80% should have been sold on the stock exchange. The latest measures of the authorities suggest an increase in the period for the mandatory sale of foreign exchange earnings by exporters from 3 to 60 days and a possible reduction in the sale of export earnings from the current 80% will have little effect on the exchange rate.

We are likely to see the ruble strengthen to ₽70/$ given that April traditionally accounts for record quarterly tax payments.

We are likely to see the ruble strengthen to ₽70/$ given that April traditionally accounts for record quarterly tax payments.

Source: ITI Capital, Bloomberg

* Estimated sales of export earnings based on total revenues of $500 billion per year, of which $400 billion is subject to mandatory sale

What to expect next? / What to do?

The positive scenario assumes a 50% chance that there will be no embargo on oil, gas and metals, as well as the completion of the special operation by mid-May. This will lead to the lifting of the most “tough” sanctions, in particular, the “unfreezing” of the gold reserves and the restoration of transactions between Euroclear and NSD, the partial withdrawal of non-residents from positions and the purchase of shares by the Central Bank for 1 trillion rubles. and companies – by 650 billion rubles, which will lead to the restoration of the market.

This positive scenario implies a high probability that non-residents will not sell all of their Russian assets. Another scenario is the preservation of the current status without growth prospects and the threat of new sanctions. The base scenario assumes further gradual sales and a decrease in quotations to the level of the beginning of the special operation on February 24.

Dividend table of Russian companies

Dividend table of Russian companies

Source: Company data, ITI Capital

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Helped investors place more than 500 million rubles. and over $200,000 in stock market instruments. Developed over 60 investment strategies. Experience in Forex - Basic and Series 1.0. Broker-dealer activity. The purpose of creating the fx-guidance website is to share with you My knowledge, experience and transfer my best practices on the topic of INVESTING IN THE STOCK MARKET, so I want to start with a FREE technical analysis course, thanks to which you will receive:✅Basic technical analysis system used by prof. investors ✅Learn to find the perfect entry and exit points ✅Begin to see long-term trends on the chart and understand the likelihood of further price movement

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