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London Losing to Moscow as VTB Group Says Buy Local

A OAO Magnit Store Stands in Krasnodar
A customer pushes a shopping cart with her purchases through the exit doors of an OAO Magnit store in Krasnodar. VTB recommended that investors “gradually” replace Magnit’s offshore stock with local shares amid a narrowing of the spread. Photographer: Andrey Rudakov/Bloomberg

OAO Moscow Exchange scored another victory in its bid to lure Russian equity trading from London when VTB Group recommended buying the local shares of the country’s biggest retailer and selling its offshore receipts.

VTB, which told investors to purchase OAO Magnit locally on Dec. 11, follows BCS Financial Group and TKB BNP Paribas in advising a shift to shares traded on the Moscow Exchange.

The firms’ recommendations stand to extend the inroads Moscow bourse officials have made in luring Russian equity trading back from London and New York. Trading volumes in 10 of the biggest Russian companies were the same in Moscow and London yesterday, while in the past year, the London volume was about 50 percent greater.

The Moscow “market is obviously becoming more liquid,” Julian Mayo, who helps manage about $2.7 billion in emerging-market assets as the co-chief investment officer at Charlemagne Capital Ltd. in London, said by phone yesterday.

The shift in trading can also be seen in the narrowing valuation gap between onshore and offshore-traded shares. The spread between Magnit in London and in Moscow narrowed to an eight-month low of 15.9 percent today. The premium for the American depositary receipts of OAO Mobile TeleSystems to its Moscow shares slid to a record low 2.9 percent from 23.45 percent in May.

Disappearing Spread

“The spread has certainly narrowed quite significantly in these examples,” Mayo said. “As investors become more comfortable trading in local shares, it will eventually disappear.”

Bourse officials have implemented several measures to lure equity investors to Moscow. The exchange moved from immediate settlement of trades to two days in September. Trading Russian shares through Euroclear Bank SA and Clearstream International SA is also due to start next year.

Moscow is not “in a struggle with London” over liquidity, the bourse’s Chief Executive Officer Alexander Afanasiev said in a Dec. 9 interview in London. “We strive for investors to trade more Russian shares rather than depositary receipts, an outdated product, which reflects a deep mistrust of investors. After the Russian securities market reform, we don’t see any reasons for such mistrust.”

‘Gradually’ Replace

Russia “is on track” to start Euroclear for local equities by July 2014, as the markets regulator “is determined to eliminate all the shortcomings of the Russian local equity market,” VTB’s Moscow-based analysts including Olga Danilenko said in an e-mailed report on Dec. 11. That will result in “the most notable contraction in the spread” between stocks trading locally and offshore, the report said.

VTB recommended that investors “gradually” replace Magnit’s offshore stock with local shares amid a narrowing of the spread. BCS recommended selling London-listed Magnit in September in favor of buying the local stock on prospects the market overhaul would cut the premium of offshore depositary receipts.

TKB BNP Paribas has more local shares than GDRs in its portfolio, expecting the spread between the two to disappear once “the government executes its promises” on making it easier for foreign investors to trade local stock, Chief Investment Officer Vladimir Tsuprov said on Sept. 24. The asset manager is BNP Paribas SA’s investment partner in Russia.

The benchmark Micex Index gained 0.2 percent to 1,452.76 today and has declined 1.5 percent this year. Valuations have fallen to 4.1 times estimated earnings amid the slowest economic growth since the 2009 recession, compared with 10.1 times estimated earnings for the MSCI Emerging Markets Index.

Russia’s economy will probably expand 1.4 percent this year, less than half the 3.6 percent pace the government forecast in December 2012, according to Deputy Economy Minister Andrey Klepach.

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