Russian stocks put ugly year behind as upside beckons

The Russian stock markets dropped on Monday, after regaining the level of September 2008. They have made Russia the third best performing market this year, with Russian blue chips once again in demand.

Both Russian stock exchanges – the RTS and MICEX – have gained almost 100% since a year ago. The markets have grown strongly since February after being oversold last autumn.

Optimistic comments from government officials predicting an end to the crisis have bolstered confidence, as well positive news from overseas. Now investors are looking for the trend to be backed by upbeat economic statistics. Head of the New Economic School, Sergey Guriev, says they are on the way.

“There are still some good signs of the fact that crisis is over globally it means that Russia will also get out of its problems and will start growing probably mid next year. Currently the statistics are not that good yet, but the signs are all there.”

Russian stocks have been driven by rising oil prices. Their recovery is also exacerbated by the size of the fall last year, much of which was due to the huge outflow of foreign capital during the crisis. More than half of investment is now domestic, but there are the first signs of a return of external capital according to Roman Goryunov from the RTS.

“The most important thing is that investors are returning to the market – both international and local investors. It's a good sign. Russian investors have dominated this year, providing the bulk of turnover, but the last couple of months has seen the appetite of foreign investors return. The last year has showed us the downside of a reliance on global investors, during a crisis. That's why we need to increase the number of long-term local investors.”

The markets may have reached an annual high, but they are still a third down on the peak figures of 2008. However, they are showing signs of resistance to the correction in global oil prices, giving hope that there will be other drivers for the Russian markets performance. Mark Rubenshtein, Chief Analyst, Metropol says the lessening of global risk aversion also helps locally.

“Increasing appetite for risk and risk reward ratio was always high in Russia, and since many companies now relax their models in terms of sustaining more risk, that prompts them to invest in Russia.”

Political risk is still holding back many foreign investors, but with Russia's recession appearing to be bottoming out, that sentiment could soon fade.