Jason Corcoran in Moscow
16 February 2009
Falling trading volumes and low liquidity are forcing managers to desert
Temperatures as low as minus five degrees Celsius last week gave fund managers a ready-made excuse for turning their backs on Moscow and finding somewhere warmer. But Russia’s rapidly freezing stock markets had rather more to do with the decision of James Fenkner, founder and managing partner of Red Star Asset Management, to move his fund’s operation to Los Angeles this month. Illiquidity has become the order of the day in Moscow-quoted equities.
Jim O’Neill, head of global economic research at Goldman Sachs, raised the possibility last month that Russia could be dropped from the Bric grouping, only to dismiss it.
Fenkner cited family reasons as his main motivation to relocate, and the fact that his seed investor, Austria’s Erste Bank, pulled its mandate, but he also depicted a market suffering from declining corporate disclosure and crumbling market infrastructure.
He said: “On the business side, Russia has become a pure macro play. Over the past year we have moved most of our portfolio into American and global depositary receipts due to a combination of value and liquidity and we really get active around 5:30pm when London and US open. Micex and most of the local share stories are a joke.”
The worsening economy and the slide in the price of oil has spurred investors to pull $290bn (€226bn) from the country since the end of July, according to French bank BNP Paribas.
Hedge funds and long-only vehicles focused on Russia began switching their focus to trading ADRs and GDRs in London and New York after Russia’s five-day war with Georgia in August. Damaging corporate disputes at miner Mechel and the Anglo-Russian joint petroleum venture TNK-BP shook the domestic markets and exacerbated the investor exodus.
Further market instability, fuelled by falling commodity prices and a weakening rouble, has led to 30 trading suspensions on the Micex stock exchange. Micex has shed 50% of its value, while its dollar-denominated rival RTS has fallen by 75% from its highs last year. The Russian RTS index was the worst performer last year after Ukraine and Iceland and came close to equalling the 85% drop experienced during Russia’s sovereign default in 1998.
Daily trading volumes in Moscow dropped off sharply from $7bn early last year to $2bn by the end of the year, which is on a par with trading volumes of 2003.
O’Neill, who popularised the term Bric as a moniker for Brazil, Russia, India and China, raised concerns about Russia’s over-reliance on oil and its poor corporate governance. Its share index has fallen far behind that of Brazil, the other net exporter of natural resources of the four.
Russian public companies are trading at the price/earnings ratio of three, whereas the ratio in January last year was 11. The average p/e ratio of emerging markets was nine and developed markets was 12 at the end of last year.
One of the results of the fall has been to drive trading back to London. Before the meltdown, analysts at Renaissance Capital estimated Moscow had 70% of equity trading volumes against London’s 30%. Renaissance said the ratio last month was 50%-50%.
Alexander Kotchoubey, head of international development for Russia and eastern Europe at Swiss private bank Lombard Odier Darier Hentsch, said the preference for GDRs and ADRs reflected the realisation that the Russian market possesses little depth or companies that offer diversification. He said: “You have to wonder why one needs to take the risks associated with local markets’ liquidity and closures when similar returns can be had through GDRs and ADRs but with a lot less hassle.”
Hedge funds operating throughout Russia and the Commonwealth of Independent States are cutting their staff and slashing costs in response to market falls and increases in client redemptions.
The closure last year of the Florin FSU Credit Opportunities fund, which was invested in real estate and equity collateralised debt, led to 10 lay-offs at the firm in Moscow and London.
Da Vinci Capital Management’s special opportunities fund, which invested in Russian equities, has bee restructured because of too little assets.
Other funds, including Denholm Hall Russian Arbitrage fund have announced they are considering a restructuring following difficulties.
East Capital Asset Management, which maintains a large investment team in Moscow, has been forced to begin trading more in London because of trading problems. The Swedish firm, which has about $1.5bn invested in Russia and eastern Europe, has cut 40 jobs from its base in Stockholm and from other centres such as Moscow. Peter Elam Hakansson, founder of East Capital, listed falling oil prices, a weakening rouble, corporate governance and financial market regulations as four reasons for Russia’s cheapness.
In a letter to investors, Hakansson wrote: “It is difficult for Russia to influence the first two factors, but the remaining two are even more important for the country to focus on. Corporate governance is once again in the spotlight, after the autumn saw some dubious interpretations of what is right or wrong according to Russian legislation.
“And lastly, financial market regulations have been making the news after the markets on occasions were shut down in such a way as to baffle observers and appear over-dramatic.”
Russia falls away from Brazil
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