Russia’s RTS Index, the world’s best-performing stock gauge in the first three months, is sliding the most this quarter as oil falls, economic growth slows and concern builds over who will vie for president in 2012 elections.
The RTS has lost 12 percent since March 31, the most among equity measures in the world’s 40 biggest markets. Investors pulled $353 million from Russian stock funds last week, the biggest outflow since 2006, EPFR Global data show. The RTS may extend declines to a level 20 percent below its 2011 peak, UralSib Financial Corp.’s Christopher Weafer said May 22.
Russian shares are falling from the highest valuations since 2008 as oil trades within 3 percent of a two-month low and Prime Minister Vladimir Putin and President Dmitry Medvedev delay a decision on who will run in the presidential elections, according to Prosperity Capital Management. Lower-than-estimated economic growth and industrial production in Russia have also fueled losses for emerging-market fund managers who have their top “overweight” holdings in the biggest energy exporter.
“The confusion over who will be in charge always comes up when we talk to investors,” said Mattias Westman, founding partner of Prosperity Capital Management, which oversees more than $5 billion in Russia and the CIS. They “would like to know the outcome before they commit” to Russia, he said.
Medvedev, 45, said “one can hope” he’ll run for re-election next year, declining to be more specific about his plans, the Kremlin’s press service said on May 19. Putin, the 58-year-old former KGB officer who picked Medvedev as his successor in 2008 because of a ban on serving three consecutive terms, said on May 6 he’s creating a coalition of supporters under his personal leadership ahead of the March 2012 presidential ballot.
“Political uncertainty is weighing on the market as is the volatility of commodities,” said Michael Kart, a managing partner at Spectrum Partners Ltd. in Moscow. “Medvedev is the first choice of foreign investors looking at Russia.”
Urals crude, Russia’s main export blend, has declined 3.4 percent this quarter to $109.30 a barrel amid a rally in the dollar and increased concern that global economic growth is slowing. The government needs crude at about $115 a barrel to balance its budget, Finance Minister Alexei Kudrin said in March, the highest-ever breakeven level.
Russia’s 4.1 percent expansion in the first quarter trailed the 4.2 percent median estimate in a Bloomberg News survey as capital flight restrained growth. The government reported a 4.5 percent gain in April industrial production last week, missing the 5.4 percent median economist estimate.
The RTS index’s decline this quarter has trimmed its 2011 advance to 1.7 percent and left it trading 15 percent below this year’s high on April 8 as of yesterday. That compares with a 2.4 percent retreat in the MSCI Emerging Markets Index this year and a 3 percent gain in the MSCI World Index of developed-nation stocks. The RTS lost as much as 1.7 percent today, before trading 0.1 percent lower at 3:55 p.m. in Moscow.
“We could easily see the market decline stretch to a technical bear market fall of 20 percent in coming weeks,” Weafer, chief strategist at Moscow-based UralSib, wrote in a May 22 report. He said investors should consider buying shares after a retreat to those levels.
Brazil’s Bovespa Index has dropped 7.7 percent this quarter, while China’s Shanghai Composite Index is down 5.5 percent and India’s Bombay Stock Exchange Sensitive Index has lost 7.4 percent.
Net capital outflows from Russia grew to $7.8 billion last month from $6.2 billion in March, RIA Novosti reported on May 20, citing Gennady Melikyan, the first deputy chairman of the central bank.
Lack of investor demand spurred five Russian companies including state-owned OAO Russian Helicopters and Nord Gold NV, the gold-mining unit of steelmaker OAO Severstal, to pull out of initial public offerings this year, according to data compiled by Bloomberg.
Credit investors have pared their bets on Russia. The extra yield money managers demand to own the nation’s dollar debt over U.S. Treasuries has increased 39 basis points, or 0.39 percentage point, from its April 6 low to 214 on March 23, according to JPMorgan Chase & Co.’s EMBI Global Index.
Russian credit-default swaps have climbed to 142 basis points from a low of 122, signaling deteriorating perceptions of creditworthiness, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. The ruble has weakened to 28.4 per dollar from 27.2 on May 4, the strongest level since November 2008, data compiled by Bloomberg show.
“Putin hinting he will run for the presidency has caused some minor nervousness among investors as it introduces a wild card,” Sergey Dergachev, who helps manage the equivalent of $9.6 billion of emerging-market debt, including Russian bonds, at Union Investment in Frankfurt, said by e-mail. “This risk factor is not fully integrated yet into spreads.”
The retreat in Russian shares this quarter is a buying opportunity as long as oil prices don’t tumble further, according to Andrew Howell, Citigroup Inc.’s emerging-market strategist in London, who has an “overweight” rating on the country’s shares. He wrote in a May 6 report that Russian stocks are “the most-attractively valued” among emerging markets.
The RTS trades for 1.2 times book value, or net assets, down from a high of 1.4 times last month, according to data compiled by Bloomberg. The Russian gauge is valued at a 39 percent discount to the MSCI emerging markets index, compared with an average 42 percent gap since 2002, the data show.
Russia’s economy will accelerate in the second half as inflation slows and the ruble strengthens, Goldman Sachs Group Inc. strategists led by Sergei Arsenyev in Moscow wrote in a May 17 research note. Arsenyev recommended buying Russian shares and reducing positions in Turkey.
Yandex NV, owner of Russia’s most-popular Internet search engine, raised $1.3 billion in a U.S. initial public offering this week. The Moscow-based company sold 52.2 million shares, or a 16.2 percent stake, at $25 each, valuing the company at about $8 billion, Yandex said in an e-mailed statement yesterday. That’s above the original $20 to $22 range. The shares surged 55 percent on its first day of trading on the Nasdaq yesterday.
Managers of global emerging market funds already had a bigger consensus overweight position in Russia than any other country in March, meaning they held more Russian shares than were represented in benchmark indexes, EPFR Global data compiled by JPMorgan show.
Money has flowed out of Russian equity funds during the past two weeks, with investors pulling more than $420 million from May 4 through May 18, according to data compiled by EPFR Global, a research firm based in Cambridge, Massachusetts. That compares with $390 million of outflows from China funds and $144 million of redemptions from India funds. Brazil funds had $65 million of inflows, the EPFR data show.
Medvedev told reporters last week he wants a faster pace of “modernization” for the country than Putin and said freeing jailed former Yukos Oil Co. billionaire Mikhail Khodorkovsky wouldn’t be “dangerous” for Russia. Khodorkovsky was sentenced to six years in prison in December, on top of an initial eight, on fraud charges he says were filed because of his opposition to Putin. Yukos went bankrupt in 2006 after Putin’s government claimed more than $30 billion in back taxes. The Moscow City Court yesterday rejected Khodorkovsky’s appeal to overturn his conviction.
Putin said last month that Russia must avoid liberal “experiments” to ensure sustainable economic growth.
“The chance that the next president of Russia will be either Medvedev or Putin is astonishingly high,” said Peter Jarvis, senior investment manager at Pictet Asset Management, which has about $1.5 billion invested in Russia. “In terms of backing one horse or the other, only two people have the answer to that.”