May saw Russia’s investors pile into the abundant Eurobond issues, which doubled m/m, expanding their portfolios by 7% over the monthly average, according to Aton’s monthly trading trends note.
Equity was a bit more mixed, but retail was the big winner vs those stocks exposed to an expected weaking of the ruble over the rest of this year. The main event was state-owned Rosneft’s renewed legal attack on multi-industry conglomerate AFK Sistema, which saw its share price collapse as a result. Rosneft is accusing Sistema of asset stripping from its oil company Bashneft that was renationalised and taken over by Rosneft in October 2016.
Bond investors took advantage of a drop in the ruble’s value to a seven-month low to load up on dollar-denominated debt, increasing their holdings by 13%, reports Aton.
The buying of Russian bonds is part of a wider trend. “EM local currency bonds (GBI-EM) have done better still, with gains of over 10% year to date, helped by improving inflation trends in a number of key markets (e.g. Brazil, Russia, South Africa, India),” IIF said in a note. “EM currencies in aggregate are some 20% below long-run average levels in terms of real effective exchange rates, implying scope for appreciation as growth differentials with mature markets widen.”
Foreign investors now account for a record third of Russian domestic debt, and Gazprombank calculated in May that foreign investors have bought about 80% of all the debt issued so far this year.
A sharp reversal of outflows from Russia in 2016 as political tensions began to ease and still sizable inflows to Turkey led non-resident capital inflows to emerging Europe to surge from $28bn in 2015 to $77bn in 2016.
Strong inflows into emerging markets (EM) continued in the first quarter of this year with non-resident capital inflows rising sharply to $54bn from $30bn in the last quarter of 2016, according to IIF.
The return of international equity investors into the Russian market saw the index gain more than 50% in the year, but this year there has been something of a reversal, especially amongst resident investors across the region.
The jump in inflows in emerging Europe in the first quarter of this year was mainly driven by a surge into the Czech Republic, in anticipation of the Czech central bank’s abandoning a longstanding cap on the CZK/EUR exchange rate in early April: non-residents stepped up their purchases of koruna-denominated government bonds to all-time high of $16bn in the first three months.
In general, interest in EM equity investment is increasing. “Concerns about the impact of an ‘America First’ orientation of US trade policy have subsided – at least for the time being – as US policymakers focus on the domestic agenda including healthcare and tax reform. Assuming ongoing improvement in global and EM growth and a gradual, well-communicated path of Fed tightening through 2018, we are now a bit more optimistic on EM capital flows. Total non-resident inflows to emerging markets should rise over 35% from 2016, reaching $970bn. Our first look at 2018 calls for non-resident inflows to top $1 trillion – which would be the best year since 2014,” IIF said in a recent note.
The international capital flowing into the region is off set by the local capital flowing out. Resident outflows in the first quarter of this year in emerging Europe remained broadly unchanged from a quarter before at $28bn, mainly driven by outflows from Russia, Poland and Turkey, says IIF, which predicts that annual resident capital outflows will increase from $31bn in 2016 to $36bn in 2017 before slowing to $24bn in 2018. Russia will probably see a net outflow of resident capital in 2017 before it turns positive again in 2018, but that will be offset but non-resident capital inflows to some extent.
Now Russia’s economy is starting to grow again equity portfolio investors’ interest has been piqued and they are cherry picking amongst the best companies, as their share prices remain undervalued, while their earnings outlooks are improving.
“In May there was a clear preference for Russia’s domestically oriented consumer sector vs exporter M&M and O&G names, as consensus expectations that the prevailing ruble strength is short-lived have started to fade,” Aton said in a note.
Positions in oil and gas as well as metal names shares fell again for the second month in a row in May – by 14% and 4% respectively – as the ruble demonstrated sustainable strength. Investors seem to put little faith in the extension of the Opec oil production cap agreement, and cut their positions in oil producers, while China’s worsening debt outlook reduced appetite for M&M stocks. Local currency strength boosted interest in domestically oriented names, with the consumer sector well bid in May, and retail clients’ equity positions up 9% vs the monthly average, according to Aton.
The big event on the equity market was the collapse of Sistema’s shares by 40% after Rosneft filed a claim against the company for RUB107bn. But the stock quickly became a top buy among those believing in a favourable court decision.
Investors also increased their positions in electronics chain M.Video after the announcement of a buyback offer at $7 per share. Investors sold supermarket chain X5 Group, taking profits after the 15% rally on strong first quarter financials which came out 25% above consensus on net income.
Investors remain focused on names with high expected dividend yields (which gained +2.4% vs the monthly average), and avoided low-dividend stocks (-2.5%).
“This is no surprise given that many companies have cut-off dates for their 2016 dividends in June-July. Although many expected ruble weakening, this did not materialise, and investors increased positions in small cap names that benefit from a strong ruble exchange rate (+2.2%), and sold exporters (-3.6%),” Aton said.