Chris Weafer of UralSib -
During the past nine months, the volume of equity trade across all Russian bourses has grown substantially. This comes against a backdrop of increased volatility, which led the RTS to a record high on December 12, then on to a fall of over 20% to the lows early February and up again to a record high on May 19. The record daily trade posted in late January - when some investors panicked and bailed-out - was over $12bn per day, while the recent May rally has seen the daily average moderate to around $9bn. This compares with an average daily volume of under $5bn in the second half of 2007.
The growth of activity in the futures and options bourses has been even more dramatic. A record-setting run over a five-day period in mid-May saw the RTS futures trade volumes exceed $3bn on several days, which is impressive when compared with a daily average of $1.1bn in the second half of last year. The volume of options trades peaked at $960m in the week prior to the RTS May record, albeit the average was just over $600m. This compares with a daily average of just over $200m through the second half of 2007. Only three years ago, the volume of trade in futures averaged less than $100m per day, while trade in options was not much more than $10m per day. For the RTS Index, Gazprom and LUKOIL trades accounted for the bulk of daily trade in these bourses, but the number of active instruments is increasing, as is the trade volume.
The uncertain environment - whereby the Russia story looks mainly positive while the international environment is risky - has provided the perfect backdrop for the growth in portfolio insurance-style derivatives, as portfolio managers look to protect against a general market fall, while sticking with the individual stock stories. This has been one reason for the growth in derivatives volumes. The other reason is the leverage that such instruments provide. As interest rates have climbed in Russia and liquidity has generally become more difficult to access, some traders and short-term investors have avoided the usual margin accounts and have instead been using the futures and options instruments to get leveraged exposure to their chosen stock names and market themes.
The daily trade in Russian equities now regularly tops the combined daily trade of all other Eastern European bourses. The split between domestic trades and those transacted in international bourses this year is split approximately 63:37 in favour of domestic volumes. However, 17% of the daily total was reported via the RTS OTC bourse, with the majority of this volume on behalf of foreign investors. Taking account of this, the real split is, therefore, not far off 50:50. Of the international trade, the majority (over 80%) was transacted via the London exchange, which is not surprising given the number of major Russian companies that have IPO'd there in recent years. This includes almost $20bn worth of new money raised via London in 2007.
Although 50% of the average daily volume is transacted on Micex and other local bourses (ex-OTC), the current split in the ownership of the free-float in total issued equities is still heavily biased towards foreign investment funds. The free-float is currently approximately 28.5% and, of this, approximately 65% can be traced to foreign funds. It is worthy noting that four years ago they accounted for 80% of the free-float. In spite of the higher proportion of domestic traded volume, the split is still biased towards foreign funds because of the slow pace of development of pension funds and the relatively slow growth in the use of savings means such as mutual funds. Both of these are dominant investors in developed economies but are still not a major factor in the Russian market.
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