Russia's equity markets are creaking back to life as the dollar-denominated RTS that is favoured by foreign portfolio investors broke out above the 900 mark and reached a ten-month high on April 29.
The rise in oil prices from under $30 to around $45 now has lifted the RTS index this year, which closed at 951 as Russia broke for the long May Day holidays. The market sold off somewhat after Russians returned to work and the index was trading at 910 at the time of writing on May 3.
The RTS has been trapped below the psychologically important 900 level since the autumn of 2014, apart from a brief rally last summer. However, the index has performed well this year, up 27% since January 1 as the bank holiday weekend started, making it the best performing market in the world.
Internet search engine company Yandex was the top-performing Russian blue chip, jumping 7.2% in the day on the back of excellent first quarter results and a guidance upgrade. Number three mobile phone company MegaFon's results also impressed the markets, the stock gaining 5%. The oil sector and banks outperformed too, with the blue chips in the sector gaining some 3-4% in dollar terms, while retail banking giant Sberbank, a favourite of foreign investors, added 4.2% on the day’s rally.
Russian equities remain very dependent on the price of oil and much of the rally can be linked to the recover of the oil prices, but as bne IntelliNews showed in a piece last week "What's the fair value for Russia’s equity market?" that relationship seems to be breaking down.
The rule of thumb used to be the fair value of both the RTS index and the ruble-denominated MICEX index is simply 15.5-times the price of oil and the rule has been remarkably robust until recently. As the chart shows, the link between the RTS and MICEX was compressively destroyed by the devaluation of the ruble in December 2014 and since the two indices have sharply diverged, with the MICEX hitting a new all-time high in the last week of April of 1957. (MICEX had fallen back to 1909 at the time of writing.)
The MICEX index has also done well this year and was up 12% as of April 29. But the rise of both indices begs the question: which is the best one to invest into: the ruble-based locally traded MICEX stocks that are exposed to a currency risk, or the dollar denominated RTS index?
It actually makes no difference which index investors put their money into. To check bne plotted the third green line on the chart, which is the MICEX index adjusted for the dollar/ruble exchange rate and then indexed so both indices start from the same point on September 10, 2010.
The result is that the RTS lead MICEX in terms of dollar value returned very slightly at the beginning of Russia's boom years in the first part of the noughties, with the roles being reversed at the peak of the boom in the late noughties, but since then the two indices have almost perfectly tracked each other since in dollar terms.
It may make no difference to foreign investors which index to invest into, as ultimately they will take their profits in dollars, but it makes a much bigger difference to domestic investors who live and pay for their lives largely in rubles. Domestic retail have been watching the MICEX soar and since the last quarter of last year begun actively investing in Russian mutual funds (known as PIFs locally).
Foreign investors should take note as in previous rallies the domestic retail investors have typically started investing about six months before the international investors and the volumes involved got up to some RUB400bn in the boom years ($6bn at current exchange rates, but about double that at then exchange rates), which was enough to start sending prices up over the RTS value as the chart shows.
It is still too early to say if Russia is at the start of another long-term rally as a fundamental question remains open: has the "new normal" of oil prices "lower for longer" changed the structure of the economy and so the kinds of shares that will do well? And oil prices may collapse again. But it is probably significant that the shares that have done well in the last quarter include Yandex and Megafon as well as agricultural producer RosAgro and supermarket chain X5, which all cater to consumers in the real economy rather than the stars of the past like state-owned gas monopolist Gazprom or the now defunct Yukos oil company, which made money from Russia's raw material riches.