Russian equity market dynamics
Last week, the Russian equity market underperformed the broader emerging markets (EM) index by 4.3%. This was mainly due to Russia-specific factors. According to CNN, the US is discussing potential sanctions that could be imposed should Russia’s military enter Ukraine.
Among the potential measures were the exclusion of Russia from the SWIFT payment system and sanctions against Russian sovereign debt. According to Bloomberg, the US authorities and their European partners were also discussing the possibility of sanctions against some of the largest Russian banks and the Russian Direct Investment Fund (RDIF).
We believe that the introduction of material sanctions against Russia is unlikely. Firstly, any material sanctions are likely to have a dramatic boomerang effect. Secondly, in our view, the chances of Russia entering Ukraine are very low. We believe Russia massing soldiers along the Ukraine border is likely more of a ‘show of power’ on Russia’s part, designed to intimidate and to undermine the reputation of the foreign intelligence agencies. See more details in our recent flashnote.
Cumulative underperformance due to Russia-specific factors has reached 10% since 11 November 2021 (start of the negative impact from sanctions fears related to Ukraine and Belarus). In the past cumulative underperformance due to sanction related fears breached 15% level only in case it was coupled with the strong drop of oil prices. We think that chances of breaching 15% level now are very small given that we retain our view regarding supporting factors for oil we mentioned in our June flashnote “USD 60+ oil prices are likely to stay”. Moreover, there was always a complete rebound of Russian market relative performance vs EM after similar situations in the past. In most cases it happened in less than 90 days.
Main Russian news
Russian inflation rose slightly in November. The consumer price index (CPI) rose to 8.4% YoY – its highest point since January 2016 – from 8.1% YoY at the end of October. This was mostly due to services inflation, which rose to 5.2% YoY from 4.4% YoY in October. Food inflation slowed fractionally to 10.8% YoY from 10.9% YoY in October, while non-food inflation slightly increased to 8.3% YoY from 8.2% YoY the preceding month. The Central Bank of Russia (CBR) governor, Elvira Nabiullina, said that at the end of 2021, inflation may exceed the higher boundary of the official CBR forecast (7.9%). The Ministry of Economic Development’s 2021 inflation expectations rose from 7.4%-7.9% to 8% or more. The official agency’s forecast for 2022 inflation stayed at 4%.
The number of retail investors on the Moscow Exchange has reached 16.2 million. More than 937 600 people joined the Moscow Exchange in November, which was the most since the monitoring of investor numbers began. Net inflows from individual Russian investors into the Russian equity market totalled approximately USD 1.2 billion during the month, a new record. Over the last 11 months, net inflows have totalled almost USD 6 billion.
To watch…
The Central Bank of Russia (CBR) will hold a monetary policy meeting later this week.
Author: Aleksandra Kuznetsova, Investment Specialist
Sources: Vedomosti, Bloomberg, TKB Investment Partners (JSC); December 2021