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Material posted: Publication date: 04-06-2014

The actions of financier Mark Mobius, the Fund considerably reduced in the first quarter of 2014 the share of Russian assets, indicate a pessimistic assessment of the prospects of the Russian economy. However at the end of 2013 the Fund acquired Ukrainian bonds. Example möbius could be followed by other Western investors. Does this mean that the Russian economy is not just a repeat of the 2008 crisis, and where large economic disasters?

Buying garbage

Buy one-fifth of the Ukrainian government bond Fund Templeton Institutional Funds was held in November 2013. Then Ukraine represented by Prime Minister Mykola Azarov said about preparation for Association to the EU. This event gave rise to protests on the Maidan, which led to a change of government. Already at that time the purchase of Ukrainian debt was a risky investment. The probability of default was estimated more than 50 percent. Why invest in such an unreliable asset.

Actually, the reason is. Debts that likely will not repay, are cheap. But if they are repaid, then the investor very good benefit. This is especially true for investors from developed countries, where interest rates on bonds are tiny (with their power among super-reliable). It is reasonable to assume that mark Mobius, close to the establishment of the democratic party USA, has some additional information about the probabilities of external "salvation" of one or another developing country from a debt default. It is highly likely that the decision about investments in Ukrainian debt was not just a belief that Ukraine "will carry by", and the result of knowledge. Here the financier and decided to make acting for sure.

However, if the assumption of additional knowledge Mobius is correct, then withdraw from being part of Russian assets does not Bode well for the Russian economy. Although the amount of funds withdrawn from Russian assets is still small.

Who in Russia will be not good

In the disclaimer about the risks Templeton Russia says that existing and possible sanctions against Russia in connection with Ukrainian events "can lead to the devaluation of the ruble, lowering credit ratings of Russian issuers, and a decline in the value and liquidity of Russian securities".

Unlikely risks, which says the Fund could increase substantially due to current sanctions. After all, used to date the sanctions relate exclusively to individuals and not affect the Russian economy as a whole. It may be worth the "possible sanctions" in the disclaimer read as Templeton "prepared"? There is another consideration. In the case of strengthening sanctions, the Issuer's shares targeted by the sanctions, can be frozen (and among the "reset" of assets — the shares of Sberbank and Gazprom, owned by the state).

In addition to political risks, there are also purely economic. The slowdown of the Russian economy, which has continued for more than a year, may have a negative impact on the stock price.

The herd mentality

The words and actions of major international investors often not only reflect any trend as to ask it. So, the words of Soros about the weakening or strengthening of any world currency affect its course, and the news of the intention of Mr. Buffett to buy shares in any company, instantly inflate the prices of these shares. Mark Mobius is also mentioned among the world's financial gurus. So, his example could be followed by other investors. Here, however, be aware that Mobius is not out of equities entirely, but only reduced the share of participation. But if the sale of Russian shares will acquire a mass character, all including the Mobius have to "merge" Russia at all.

Regardless, does Mobius about the upcoming tightening of anti-Russian sanctions or pessimistic just looking at the Russian economy, for smaller investors, its actions may become a reason for others to follow.

What threatens Russia in this case? According to the company "Sberbank CIB", the share of foreign investors accounted for about 70 percent of traded Russian stocks. Moreover, these investments are on paper only 17 Russian companies (the largest share in Sberbank, Gazprom, LUKOIL, Magnit, MTS). The volume of shares in free circulation (free float) of Russian corporations is estimated at 25 percent of their total volume (about 213 billion dollars).

In the first quarter of 2014, the Moebius Foundation has sold almost 1.9 million preferred shares of Sberbank. At the end of last year their total value was estimated at 4.6 million dollars. The package of ordinary shares has not changed, but much cheaper — us $ 10.7 million to 8.3 million. As a result Sberbank's share in the portfolio of Templeton Russia decreased to 10.2 percent, compared with 16.2% at the end of 2013. Although it remained the largest position of the Fund. In January-March Sberbank shares were sold Templeton Russia, but a number of other funds of Mobius, specializing in Russia.

Templeton Russia completely out of the securities of mining companies ALROSA, Norilsk Nickel and Nord Gold. As at 31 December 2013 these shares in the portfolio was worth $ 5 million. In addition, the Fund closed positions in securities of X5 retail group ($4.5 million at the end of last year), a pharmaceutical company "Veropharm" (5.7 million dollars) and "Aeroflot" (0.7 million dollars). Where possible, the Fund maintained its stake in X5 retail group.

During the same period, Templeton Russia increased its investments in Romania (ranked second in the portfolio with a share of 11 per cent), Poland (7.6 per cent) and Turkey (7.2 percent).

Quietly, we fall

The MICEX index, reflecting the dynamics of the Russian stock market began to dive in February, when political crisis in Ukraine reached a climax. The index fell until it reached bottom and was not in the middle of March 1237,43 item. (for comparison, in October last year he was at 1533 points). Then, ranging from a fairly strong amplitude, the index grew, but the October level is never reached. Currently, the index of the Moscow exchange keeps at level of 1440 points.

The role of foreign investors in the Russian stock market has long been quite significant. Today among the active investors in Russia about one third of them are American funds, one third of the funds from continental Europe and about a quarter from the UK. The largest foreign investor (over $ 5 billion) is the Norwegian Government Pension Fund, followed by Vanguard Emerging Markets Stock Index Fund (about 4,7 billion dollars). The third — Oppenheimer Fund that invested in Russian equities, slightly less than 3 billion dollars.

It is obvious that the Exodus of foreign funds from the Russian market caused by the Templeton Foundation, could push the exchange to a new fall. Moreover, such a massive "reset" of Russian assets sooner or later can happen regardless of Mobius or other "sharks" of the financial market. The rate of growth of the Russian economy is slowing, and that means to earn on the shares of Russian companies more difficult.

The fact that renowned financial gurus buys and sells Ukraine Russia, of course, does not mean that the Russian economy worse Ukrainian. Without infusions from the IMF, Ukraine with its zero GDP growth for the last 20 years are not capable even to pay off debts. Moebius actually investing in defaulted paper, believing (or knowing for sure) that go bankrupt Ukraine will not.

In Russia while it is only a slowdown in growth. It's bad, but not fatal. But the described above dynamics of the domestic stock market should be of concern not only to its participants but also among citizens. Because it threatens the country with rising unemployment, falling incomes, even those who are not selling shares, and just works in the respective corporations. Yes and the government should not turn a blind eye to the possible withdrawal of foreigners from the Russian trading platforms. To replace them because the money may be nothing.

Gregory Kogan


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