White House press secretary Jay Carney’s debut as a short-selling tout is off to a rough start.
Since Carney said March 18 that the only investments worth making in Russian equities are wagers the market will decline, short sellers have been pulling out as the Micex gauge stabilized. The percentage of borrowed shares in the biggest U.S. ETF (RSX) tracking Russia’s market -- a barometer of short selling -- has fallen to 14 percent of the total stock, from 17 percent the day Carney spoke and a record 21 percent on March 3, according to financial data provider Markit.
Equities are bouncing back in Moscow after President Vladimir Putin’s push to annex Ukraine’s Crimea peninsula sparked the worst standoff with the U.S. since the end of the Cold War and sent the Micex into a bear market. The gauge is up 9.1 percent from a four-year low reached March 14 as traders bet the sanctions imposed by President Barack Obama and his European counterparts don’t go far enough to curb growth in the world’s biggest energy-exporting nation.
“Investors are no longer afraid of sanctions and the market shows that,” Victor Bark, who oversees about $2.8 billion at Alfa Capital as the head of asset management in Moscow, said by phone on March 26. He said no “serious” investor paid attention to Carney’s comments.
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When asked yesterday about the market’s performance, Carney told reporters traveling aboard Air Force One in Europe that Russia’s isolation will have an impact on its economy and currency. Ben Rhodes, Obama’s deputy national security adviser, said during the flight that the World Bank’s decision yesterday to warn of a possible recession in Russia shows “you’ve already seen” an impact from the sanctions.
“International investors want to know that the places they’re investing are places where the rules of the road are followed,” Carney said.
Speaking a week earlier at a press briefing, Carney cautioned people against buying shares in Moscow. “I wouldn’t, if I were you, invest in Russian equities right now, unless you’re going short,” he said.
The Micex Index fell 1.5 percent at 1,329.27 by 8:36 a.m. in New York, bringing the decline since March 18 to 0.6 percent. The dollar-denominated RTS Index is up 1 percent since then. The Bloomberg index of the most-traded Russian shares in the U.S. has gained 3.2 percent over the past three days, sending it toward the biggest weekly advance since October. Traders are also paring back bearish bets in the options market. The put-to-call ratio on the Market Vectors ETF has dropped to 1.06 from 1.3 the day before Carney spoke, according to data compiled by Bloomberg.
U.S.-based exchange-traded funds investing in Russian equities deposited an additional $57.3 million on March 25, the biggest increase among 46 country-specific ETFs tracked by Bloomberg. Total inflows this year are $271 million.
“The market has bottomed and is recovering,” Mattias Westman, who oversees about $3.3 billion in Russian assets as chief executive officer of Prosperity Capital, said in a phone interview from Amsterdam yesterday.
The U.S. has imposed asset freezes and visa bans on 31 Russians, Ukrainians and Crimeans, including political and business figures close to Putin. The 28-nation European Union has put 51 people on its blacklist, including some on the U.S. roster, while stopping short of punishing businesspeople.
The rebound in stocks could prove fleeting, said J.P. Natkin, director of new business development for Macro Advisory consultancy in New York.
“The situation is so fluid and uncertain and so unstable,” Natkin said by phone yesterday. “Is Russia going to be satisfied with just Crimea or will it be more aggressive and want more of Ukrainian territories?”
Putin said during a March 18 speech to Russian lawmakers that he doesn’t plan to further split up Ukraine.
Gains in Russian equities have been led by power company Federal Grid Co. and retailer OAO Dixy Group, both of which have advanced more than 30 percent since March 14. The ruble has also started to recover, rising 3.1 percent over the past eight trading days after tumbling 10 percent in the first 2 1/2 months of the year.
Valuations (INDEXCF) on Russian stocks plunged to a record low of 2.85 times estimated earnings on March 14, a 67 percent discount to the MSCI Emerging Markets Index, according to data compiled by Bloomberg. Those cheap prices are proving irresistible to some investors, Westman said.
“The valuations are very attractive, dividend yields are high,” Westman said. “People were afraid that Russia would go into other parts of Ukraine. Those fears are receding.”