FINANCIAL MARKETS in MARCH 2014 N.Andrievsky, E.Khudko

FINANCIAL MARKETS IN MARCH 2014

FINANCIAL MARKETS IN MARCH 2014 N.Andrievsky, E.Khudko

Foreign poli cal events that took place in March 2014 had an extremely adverse impact on the Russian stock market. It took the MICEX Index just one day to tumble by 10.8% on March 3, 2014. Stock market capitaliza on lost Rb 1,72 trillion in March 2014, while total capitaliza on amounted to Rb 21,7 trillion (33.5% of GDP )as of March 26, 2014. The situa on in the Russian corporate bond market kept worsening in March 2014 in response to moun ng adverse trends in the Russian economy. The key market indicators, such as market volume and index, weighted average yield of issues, investment ac vity in the primary and secondary markets saw a downtrend during the month.

Dynamics of the Russian stock market be noted that besides the foregoing most liquid Rus- basic structural indices sian stocks, the top-5 most traded stocks also includes Moun ng tensions in Ukraine had an extremely ad- Magnit retail company. Besides, Mechel and Airﬂ ot verse impact on the Russian stock market. The MICEX used to fell into this group of companies from me to Index dropped 1444,71 points at closing in the Mos- me. Overall, the eight most traded shares accounted cow Exchange on February 28, 2014 to 1237,43 points for 70% to 80% of the Moscow Exchange daily trading by March 14, 2014. turnover. VTB’s shares dropped 24.62% by March 14, 2014 According to the Emerging Por olio Fund Research since February 27, 2014 while Sberbank’s shares (EPFR), founda ons inves ng in Russian shares saw a lost 20.4% of the value over the same period, and Gazprom’s shares fell more than 15%. It is only Norilsk 1550 125 Nikel’s shares that saw growth in March 2014, gaining a 1500 120 1450 115 maximum of 6.76% in the period of February 27, 2014 1400 110 thru March 7, 2014. 1350 105 1300 100 Sberbank’s stock showed a nega ve yield by 1250 95 March 26, 2014, with annual loss reaching 15.0% since 1200 90 March 26, 2014 2013. However, VTB’s shares lost most of its value among the most liquid Russian stocks in 04.02.2013 04.03.2013 04.04.2013 04.05.2013 04.06.2013 04.07.2013 04.08.2013 04.09.2013 04.10.2013 04.11.2013 04.12.2013 04.01.2014 04.02.2014 04.03.2014 the period of 26.03.13 thru 26.03.14, reaching 25.6% MICEX Index Brent crude oil prices (right-hand scale) in losses. Norilsk Nikel’s shares saw an annual growth of 14.2%, whereas Gazpom’s shares, LUKOIL’s shares Source: RBK Quote. and Rosne ’s shares lost 1 to 3%. Fig. 1. Dynamics of the MICEX Index and futures prices The dynamics of sector indices early in March 2014 of Brent crude oil in the period showed the same downward response in external of February 4, 2013 thru March 26, 2014 events, falling in the period of February 27, 2014 thru 10,0 March 17, 2014 from 8.5% on the oil and gas sector 5,0 index to 15.92% on the energy sector index. It is the 0,0 -5,0 machine building sector index that saw the deepest -10,0 sinking, 25.92%, during the period. -15,0 Average daily trading turnover in the Moscow Ex- -20,0 -25,0 change in March 2014 was Rb 64,5bn. Sberbank’s stock -30,0 contributed an average of 32.5% to the stock exchange

turnover on a total of common and preferred stocks. It 27.02.14 28.02.14 03.03.14 04.03.14 05.03.14 06.03.14 07.03.14 11.03.14 12.03.14 13.03.14 14.03.14 17.03.14 18.03.14 19.03.14 20.03.14 21.03.14 24.03.14 25.03.14 26.03.14 is only Gazprom, accoun ng for an average of 20.3% Sberbank Sberbank prev LUKOIL Norilsk nickel of the Moscow Exchange turnover in March 2014, that Gazprom Rosneft VTB was able to compete with Sberbank. Therefore, the Source: RBK Quote, author’s es mates. two major companies accounted for up to 50% of the Fig. 2. Most liquid Russian stocks growth trading turnover in the Moscow Exchange, whereas rates in the Moscow Exchange in August 2014 the next top-5 companies contributed 24.7%. It should (within a period since February 27, 2014)

11 RUSSIAN ECONOMIC DEVELOPMENTS No. 4, 2014 capital infl ow in the period of February 27, 2014 thru 20 14,2 March 26, 2014, for the fi rst me since the begin- 10 ning of year. The volume of capital infl ow amounted 0 -0,9 -2,3 -3,0 to $377m. The infl ow was associated with the Rus- -10 -6,3 sian stock market recovery a er the failure of inves- -20 -15,0 tors’ expecta ons of western countries imposing strict -30 -25,6 sanc ons on Russia. Moscow Interbank Currency Ex- Sberbank Sberbank Gazprom LUKOIL Rosneft Norilsk VTB prev nickel change (MICEX) capitaliza on totaled Rb 21,73 trillion 25/03/13 – 25/03/14 (33.5% of GDP) as of March 26, 2014. The capitaliza- Source: RBK Quote, author’s es mates. on dropped more than Rb 1,72 trillion (-7.34%) since Fig. 3. Most liquid Russian stocks growth rates in the Moscow February 27, 2014. In March 2014, mineral produc- Exchange in the period of March 26, 2013 thru March 26, 2014 on companies’ increased by 0.8 p.p. to 48.8% while the share of manufacturing sector companies gained 5,0 0.5 p.p. to 12.8% in the MICEX capitaliza on struc- declined0,0 insignifi cantly as was an cipated.Financial and Moreo- banking companies ture. At the same me, the share of retail and whole- ver,-5,0 this can be explained in part by a seasonalMachine building slack. companies sale trade companies, and fi nancial sector companies For-10,0 instance, in the period of February 24, 2014 thru Oil and gas companies shrank by 0.5 p.p. and 0.6 p.p. respec vely. March-15,0 24, 2014 the total transac ons volume in the Energy companies Moscow-20,0 Exchange amounted to Rb 108,7bn (to com- Corporate bond market pare,-25,0 trading volume in the period of inMetal the & periodmining of companies -30,0 The Russian domes c corporate bond market volu- January 24, 2014 thru February 21, 2014Consumer amounted sector me (measured by the par value of outstanding secu- to Rb 117,8bn), while the number of transaccompanies ons in MICEX-innovation index

ri es denominated in the na onal currency, including 27.02.2014 03.03.2014 05.03.2014 07.03.2014 12.03.2014 14.03.2014 18.03.2014 20.03.2014 24.03.2014 26.03.2014 those issued by non-residents) declined in March 2014 for the ﬁ rst me over the recent years. By the end of Source: RBK Quote, author’s es mates. March 2014 the indicator amounted to Rb 5260,2bn, Fig. 4. Growth rates in various sector stock indices in the Moscow Exchange (within a period since February 27, 2014) seeing a decline of 0.5% less against the value observed 1 at end of February 2014 . The indicator dropped in Financial business 14,0 Other types of response to reduc on in the number of issues (1044 Transport and activity 1,0 corporate bond issues registered in the na onal cur- communications 9,9 rency against 1054 issues at the previous month end), Wholesale and Mineral whereas the number of issuers in the debt segment retail industry; extraction repair services industry 48,8 even inched up (360 issuers against 355 companies 9,2 at the end of February 2014). At the same me, the Production and distribution of number of USD-denominated bond issues of Rus- electric power, Manufacturing industry gas, and water sian issuers increased from 12 to 16 (a total of more 12,8 4,3 than $2,2bn). Addi onally, there was an outstanding JPY-denominated bond issue. Investment ac vity in Source: The Moscow Exchange’s oﬃ cial website, authors’ the secondary corporate bond market in March 2014 es mates. Fig. 5. Stock market capitaliza on structure 1 According to Rusbonds informa on agency. by type of economic ac vity

120,0

100,0

80,0

60,0

40,0

20,0

0,0 27.02.2014 28.02.2014 03.03.2014 04.03.2014 05.03.2014 06.03.2014 07.03.2014 11.03.2014 12.03.2014 13.03.2014 14.03.2014 17.03.2014 18.03.2014 19.03.2014 20.03.2014 21.03.2014 24.03.2014 25.03.2014 26.03.2014

Sberabank (common+ privilege shares) LUKOIL Rosneft Norilsk nickel VTB Gazprom Magnit Общий оборот

Source: RBK Quote, author’s es mates. Fig. 6. Trading turnover structure in the Moscow Exchange (in the period of February 27, 2014 thru March 26, 2014)

12 FINANCIAL MARKETS IN MARCH 2014

the period under review slightly decreased to 26,000, 25 390 but remained at a high level (to compare, the num- Effective yield Index IFX-Cbonds 370 20 350 ber of transac ons in the previous period amounted 330 to 27,900)1. This dynamics of trading shows that small 15 310 290 investors were interested in trading securi es. 10 270 Effective yield, % Effective 250 IFX-Cbonds Index The Russian corporate bond market index IFX-Cbonds 5 230 stopped growing. Its value declined by 4.4 points (or 210 1.2%) by the end of March 2014 against the value ob- 0 190 served in the previous month. The corporate bond average weighted yield saw a sweeping growth, reach- 24.09.2007 24.12.2007 24.03.2008 23.06.2008 24.09.2008 24.12.2008 24.03.2009 25.06.2009 25.09.2009 23.12.2009 25.03.2010 24.06.2010 24.09.2010 22.12.2010 24.03.2011 23.06.2011 23.09.2011 22.12.2011 23.03.2012 25.06.2012 25.09.2012 21.12.2012 25.03.2013 24.06.2013 23.09.2013 19.12.2013 24.03.2014 ing the local high for the recent 1.5 years, and stood at 9.4% by the end of March 2014 against 8.5% late Source: According to Cbonds Informa on Agency . in February 2014 (Fig. 7)2. Dura on of the corporate Fig. 7. Dynamics of the Russian corporate bond bond por olio kept falling, being 605 days as of the market index and average weighted yield end of March 2014, 82 less than the value observed Total emission Amount of placed issues as of the end of previous month. Such a dynamics of 280 80 dura on resulted from mostly growth in interest rates 240 70 60 in the market. 200 50 The worsening of the condi ons in the Russian 160 stock market was to a large extent triggered by po- 40 120 30 li cal events, whereas sta s cs on the key macro- billion rubles 80 economic metrics in the United States and Europe 20 showed that the economy in these countries was 40 10 Amount of placed bond issues of placed Amount Total volume of placed bond issues, bond of placed volume Total recovering. First of all, a dras c increase of 1.5 p.p. 0 0 of the key interest rate by the Bank of Russia’s had Jun.08 Jun.09 Jun.10 Jun.11 Jun.12 Jun.13 Oct.07 Oct.08 Oct.09 Oct.10 Oct.11 Oct.12 Oct.13 Feb.08 Feb.09 Feb.10 Feb.11 Feb.12 Feb.13 Feb.14 an adverse impact on the dynamics of market rates. Interna onal ran ng agencies downgraded their pro- Source: According to Rusbonds informa on agency. jec ons for Russia and a few Russian issuers in the Fig. 8. Dynamics of ini al public off erings of corporate period of February thru March 2014, and rankings bonds denominated in the na onal currency and forecasts for Russian companies are likely to be further adjusted in the months to come. This pro- In March 2014, Russian bond issuers’ ac vity re- duced extra pressure upon the yield. Such Russian garding registra on of new bond issues declined af- companies as MTS and Sistema JSFC whose projec- ter hi ng a record in February 2014, however it was on was revised as posi ve were not aff ected by the maintained at a high level as compared to previous trend. months. For example, 17 issuers registered 35 bond The most liquid corporate bond market segment issues at an aggregate par value of Rb 140,5bn in the saw, unlike the previous period, a strongly pronounced period of February 22, 2014 thru March 24, 2014 (to uptrend in the yield of bond issues (except a few 2- er compare, 61 bond issues at Rb 398,6bn were regis- companies which saw a decline in their bond yield). Fi- tered in the period of January 24, 2014 thru Febru- nancial issuers, namely Vnesheconombank, ОАО Rus- ary 21, 2014). sian Agricultural Bank, ОАО Gazprombank, as well The worsening of market condi ons had an adverse as ОАО Bashne saw the highest growth in the yield eff ect on the primary market whose trading fi gures (more than 2 p.p.). It should be noted that fi nancial dropped lowest since the middle of 2012. For example, sector companies’ securi es saw a substan al overall 9 issuers placed 11 bond issues at an aggregate par growth in the yield (an average of more 1 p.p. for liquid value of Rb 35,7bn in the period of February 22, 2014 bond issues), which was the case either during large- thru March 24, 2014 (to compare, 13 ruble-denomi- scale sale of securi es, or, otherwise, an extremely low nated and four foreign currency bond issues at a par investment ac vity. Securi es of producing and hi-tech value of Rb 112,8bn and $400m respec vely were companies saw less pronounced growth in the yield on placed in the period of January 24, 2014 thru Febru- bonds, about 0.8 p.p. and 0.5 p.p. respec vely. How- ary 21, 2014) (Fig. 8). Exchange-traded securi es ac- ever, there was high demand for the securi es of such counted for almost half of the bond issues placed. issuers as MTS and Sistema JSFC. However,– ZAO Ipotechny Agent Petrocommerсe-1, a mortgage agent, managed to borrow for a period of 1 According to Finam Investment Company. almost 33 years while another two issues for 10 years 2 According to Cbonds Informa on Agency.

13 RUSSIAN ECONOMIC DEVELOPMENTS No. 4, 2014 despite low investment ac vity and adverse projec- under the circumstances. Twenty two corporate bond ons for the Russian market. issues at a total of Rb 61,3bn are to be redeemed in In March 2014, two bond issues were declared void April 20142. and cancelled for registra on by the Bank of Russia for Addi onally, no real default(s) (e.g., when the is- non-placement of a single bond (no bond issues were suer has failed to repay to bondholders even within declared void by the Bank of Russia Financial Markets a grace period) on coupon yield payment and early Service for non-placement of a single bond in Febru- redemp on(s) of securi es on the put date and full re- ary 2014)1. payment were reported in the market in the period of In the period of February 22, 2014 thru February 22, 2014, like in the previous months3. At the March 24, 2014, all 19 issuers redeemed their bond same me, it should be noted that one issuer declared issuers at an aggregate value of Rb 82,8bn on the date a technical default on the coupon yield during the pe- of maturity (all of the issuers honored their obliga ons riod under review. and no technical default was announced in the previous months). This is a posi ve factor in the market 2 According to Rusbonds company. 1 According to the Bank of Russia. 3 According to Rusbonds company.