2021 review of the Russian economy and stock markets
by Timur Aliyev
For the Russian market, the end of 2021 saw the outflow of monetary assets from foreign investors and an accelerated fall in key indices, amid foreign policy tensions and mixed signals from international stock exchanges. Discussions of the Russian conflict in Ukraine, the aggressive rhetoric between Russia and the West and the risk of imposing a new round of sanctions have been instrumental. Geopolitical risks and the hardening of the tone of Western countries with regard to Russia are for the time being making investors forget external factors.
The pandemic, and in particular the emergence of the Omicron variant of Covid-19, also continues to have a significant impact on global and Russian market dynamics. Moreover, the suspension of trading in Rusnano bonds has caused uncertainty and concern throughout the Russian market.
One of the results of the year was the withdrawal of $220 million of foreign assets from Russian equities – a record amount since April 2020. However, this behavior went beyond the Russian market. International investors sold assets in almost all emerging markets, fearing a tightening of US Federal Reserve policy, as investors shifted money into stocks of US companies. Ahead of the last Fed meeting in 2021, Fed Chairman Jerome Powell sharply tightened his rhetoric, dropping the term “transient inflation,” and the last Fed meeting suggested that three rate hikes are possible in 2022. Global investors have reassessed risk and hedged in response, and as a result, cash flows are shifting from emerging markets to stronger, crisis-resistant developed markets. According to EPFR, funds in developed markets have raised nearly $34 billion since the start of the month to mid-December.
September was the best month for the Moscow Stock Exchange this year, with the index hitting new all-time highs for most of the month, peaking towards the end of September. However, Russian indices fell significantly towards the end of the year against a backdrop of high inflation and negative central bank policy expectations. In mid-December, for the first time since April 2021, the MOEX Russia index fell to 3,532.29 points, although it was then able to recover most of its losses. However, experts believe that the decline is mainly due to foreign investors, as Russian investors have long been accustomed to geopolitical tensions, sanctions, rhetoric and other factors that discourage foreign capital. Russian investors know the situation from the inside, they are less likely to panic: they observe the growth of dividend yields and plan their purchases.
The emergence of the Omicron variant of the coronavirus, along with news of its rapid spread and accompanying rise in global inflation, have all had a negative effect on Russian market dynamics. A series of new lockdowns in European countries is also greatly affecting the stock situation in Russia. The US market, however, took into account the corona news from Europe, and there were no new lockdowns in the US either.
At the same time, due to the black swan in the form of a pandemic, an excess of liquidity has been created, as states have to spend significant funds to combat the spread of the virus, to treat and vaccinate the population. These costs have contributed to inflation. Economic stagnation and pressure on small and medium-sized businesses have led to a significant drop in GDP growth in Russia. It will take time to restore the normal functioning of economic processes and the labor market.
Towards the end of the year, the Central Bank of Russia decided to raise its key rate to 8.5%. This step was not a surprise, especially since the regulator itself had warned in advance of the increase. The reason for such a measure was inflation, which exceeded the expectations of the Bank of Russia. The Central Bank expects this increase in the key interest rate to help slow the rate of price growth and bring inflation back to the previously targeted level of 4% by the end of 2022. The regulator n ‘t rule out that he will have to raise the rate again in the future.
As for the performance of specific companies, VK Company (MCX:VKCODR) (Mail.ru), Petropavlovsk PLC (MCX:POGR) and X5 Retail Group NV (MCX:FIVEDR) are among the biggest losers this year . VK (Mail.ru) is down 40% since the start of the year, a record drop among all stocks in the index. Its shares continue to fall past all-time lows, already trading below 1,200 rubles. Experts link this trend to the fact that billionaire Alisher Usmanov sold his stake in VK, followed by Gazprombank which bought and then transferred his stake in VK to Gazprom-Media Holding.
Shares in gold miner Petropavlovsk have fallen 33% since the start of the year. In the first half of the year, shares came under pressure from the owners’ corporate dispute and reduced production capacity.
Shares of major retail group X5 have also not pleased investors this year, a year in which shares have fallen 25% from levels seen 18 months ago. The impact of inflation is evident here, as price pressure in the economy has led to a general rise in the cost of goods and services, as well as food. It would seem that retail should skim the cream and pass on price increases to customers. But this is not the case – people save more on products where a high marginal margin from the middleman is allowed, and in the pricing of essential products taxes are built in.
Despite all the negative factors above, there have been successes in the Russian stock market this year. Some companies showed stable growth and profitability in an unstable market environment, including Gazprom (MCX:GAZP), Sberbank Rossii PAO (MCX:SBER), VTB (MCX:VTBR) and NK Rosneft PAO (MCX:ROSN) .
Gazprom posted an IFRS profit of 1,590 billion rubles in the first 9 months of the year, compared to a loss of 202 billion rubles a year earlier. The company expects to receive record dividends and have a double-digit dividend yield by the end of 2021.
As for Sberbank, its shares became the most popular stocks on Russian-speaking social networks in 2021, according to a study by Brand Analytics. The second place in the ranking was taken by the shares of the already named Gazprom, the third place was taken by Yandex NV (MCX:YNDX) (NASDAQ:YNDX). Since the beginning of the year, ordinary and preferred shares of Sberbank have increased by about 20%.
VTB’s IFRS net profit for the first half of the year increased by 307.2% year-on-year and amounted to 170.6 billion rubles. Moreover, VTB is often cited by experts as one of the best investment opportunities among Russian companies in 2022. Bank Director Andrei Kostin predicted that by the end of the year, the profits of VTB will exceed 300 billion rubles. At the same time, the executives have repeatedly announced that they will maintain their intention to pay 50% of net profits to ordinary shares. Presumably next year VTB will post an unprecedented high dividend yield of around 15%.
At the end of Q3 2021, Rosneft’s financial results exceeded forecasts, with net income up 35% compared to Q2 2021. In addition, a strong factor of investment attractiveness in Rosneft is the in place of a major project, Vostok Oil. Many analysts also consider it an attractive investment target. Russian broker BCS included it in a similar list in December. In addition, the largest US investment bank JP Morgan has also listed Rosneft on the list of top global opportunities in 2022. Analysts believe that the oil sector will drive economic activity in Russia. The price of oil is expected to continue rising in 2022, with an expected average price of $74 – above the annual average of the past 7 years.