“You're simply the best, better than all the rest!”
That’s what Tina Turner would be belting out if she were an investor into Russian’s equity markets.
One of the major changes in the market over the last few years is that it has become a high yielding market and we can see how it has diverged from other EM markets in this aspect.
Even without dividends the Russian market performed much better than many forecasters predicted in 2018. Using the benchmark MSCI’s $country indices data, Russia closed out the year a creditable -5.6%. This compares to MSCI Emerging Markets Index performance of -14.6% and when you additionally consider dividends, Russia finished 2018 almost flat, down only -0.7%. If you consider all that has been going on with Russia in the last year that is a rather impressive performance.
And things at the corporate level are even more impressive. There were 10 stocks in RTS Index with double digit yields, including some well-known stocks such as Alrosa (11.3%) and Aeroflot (12.7%) with no depository receipt (DR) equivalent, that allows them to be listed on international markets. Investors not able to trade the local market have no way of accessing these returns.
The two largest dividend payers by consideration were Russia’s leading state-owned retail bank Sberbank and the state-owned gas giant Gazprom (RUB271bn and RUB190.34bn, respectively, or in dollar terms $4.07bn and $2.86bn).
However, while investors can tap these gains on international markets if they buy the DRs, that comes with a heavy cost that eats into profits.
We estimate that the DR banks took fees equivalent to 4% and 8%, respectively, of the DR dividend payments in 2018 for these stocks. It gets worse for Russia’s second largest bank, the state-owned VTB Bank: we estimate the cost at 38% of the DR dividend payment. The fees tend to be higher for lower-priced securities. The calculations are based on dividends paid last year with the price of the security as of December 31, 2018.
If you do hold DRs, we have put a page up on our website where you can tap in your positions and compare how you would have fared holding the locally listed shares on Moscow Exchange (MOEX) as opposed to buying the international listed DR equivalents that calculates the returns, taking into account the fees the banks managing the DR charge.
A refrain you hear often from Moscow Exchange is: if you can access the local market why pay the DR bank for this service? This is actually the conclusion the market is coming to and in 2018 MOEX had 63% of trading compared to the London Stock Exchange (LSE) where the local line is also traded there in a DR form.
That’s a gain of 5 percentage points in one year. This story is continuing into 2019. So far in January, MOEX has had five days where it has had over 70% of the volume and on January 21 MOEX had an impressive 77% -- the highest percentage when both markets are open.
This change in trading liquidity is reflected in the cost of trading a nominal €50,000 deal, which we use to reflect institutional trading. This shows that at the start of 2017 both markets had the same spread of 17 bps; on MOEX this has decreased to 13 bps while on the LSE this has gone up to 22 bps.
Bid-ask bps spread on nominal €50k deal
Data provided by Liquidmetrix
The major indices providers, FTSE Russell and MSCI, both reflect this change and have helped in the shift to trading the local, partly by just adopting the use of MOEX’s Closing Auction in their methodology (see graph below). This reflects the development of the market and is illustrated by the fact that in 2018 FTSE Russell had four Russian DRs in GEIS but only Polyus survived the cut into 2019.
The only addition of a DR was in the MSCI Russia IMI Index and that was perversely of X5 Retail Group on Moscow Exchange. This shows the demand to trade Russian names in Russia.
We can see how the market structure has changed and become more comfortable for internationals with the growth of trading in the closing auction.
The reasons for these changes are manifold. There is the shift in international trading to the local market. But at home we are also seeing growth of trading not only from institutional participants but notably from the retail segment: one million new retail accounts have been opened in 2018.
The graph below shows the main providers of the new retail accounts. We’ve discussed the reasons for this in the past, which include lower interest rates, tax benefits as well as the growth in fintech, which has enabled new providers such as Russia’s only pure online bank Tinkoff Bank, and an investors darling, to come to this market quickly. These factors are not going away; this will be an ongoing trend.
This comment was contributed by Tom O'Brien, head international sales at Moscow Exchange who is based in London