Trading on the Russian stockmarket was suspended twice last week as heavy outflows forced down the RTS and Micex indices.
The Micex plummeted by 18% after trading opened on Tuesday, the largest one-day move since the Russian banking crisis in 1998. The RTS suffered a similar fall. In a rare move the government halted trading for the day to allay fears of a market collapse.
Concerns were reignited as trading resumed on Wednesday, when the Micex immediately fell 6%, driving it down 57% from its peak in May and resulting in a suspension of trading until Friday.
As Fund Strategy reported (August 18), Gareth Morgan, manager of the F&C Russia Investment Company, and Elena Shaftan, manager of the Jupiter Emerging European Opportunities fund, had begun scaling back their positions in Russia before the latest crisis.
“We had some issues in Russia with South Ossetia, [Russian mining company] Mechel, TNK-BP and an underdeveloped institutional investment market,” says Morgan. “There are obviously worries about counter-party risk, with rumours flying about who is in trouble.”
Forecasts for Russia had looked good, with high commodity prices and a relatively stable geopolitical outlook. But the situation reversed in May and stockmarket falls were exacerbated by the sharp decline in oil prices.
Both Shaftan and Morgan say that, unlike in the past, the problem is not foreign investors pulling money out of Russia but local private investors who cannot meet margin calls on their debts. “What we are seeing is a liquidity crisis,” says Shaftan. “Leveraged positions are being unwound, margin calls are forcing traders to liquidate positions, while brokers are pulling credit lines over fears of counter-party risk as smaller market participants struggle.”
At current valuations Russian companies are trading on single digit price/earnings ratios, which Shaftan says may present “an historic buying opportunity”.
Although fundamentals might look appealing, increasingly negative sentiment may drive markets even lower before we see a recovery, Morgan says.
The markets rallied strongly on Friday. Micex opened up 12.5% on news that the government was ploughing $20 billion (£11 billion) into the markets and banning margin selling and short selling.