Refuge from Brexit: how Russia became the “safe haven” for investors


Events in global markets unfolding after Friday’s vote in the UK, showed that Russia is among the few other countries less than others dependent on world shocks. In the rare situation where the world is bad, but for Russia there is nothing particularly wrong with that situation there. And Russian government bonds have not decreased, and the shares continue to walk in the usual corridor, even closer to the lower boundary. Rouble in General is hard,” wrote in a research note the main trader “Renaissance capital” Alex Bachurin. Along with other emerging markets, Russia has become a new “Paradise for investors,” said Bloomberg.

According to the Financial Times, two days of trading after the victory of the eurosceptics for a referendum on Brexit world stock markets lost $3 trillion, of which $2.8 trillion has had on the stock markets of developed countries. Index S&P Global Broad Market after the referendum fell 6.9%. This is the most severe two-day decline after the collapse of the financial crisis in November 2008. According to S&P Dow Jones Indices, the result became the 12th among the largest landslides in the history of observations. S&P 500 in two days lost almost $1 trillion — the fall was the third largest in monetary value.

For comparison: in Russia, after the announcement of referendum results in the UK, Friday’s trading on the Moscow stock exchange opened with the decrease of the MICEX index by 3.28% to 1856,3 points), but by the end of the day, the decline has been partially played, and on Tuesday, the index began to grow (by the end of the main trading session by 0.84%, to 1857,23 points). The growth of prices for the Russian papers is observed on Tuesday at the auctions in London: the papers of LUKOIL on LSE have grown on 1,25%, NOVATEK — has risen by 1.27%. A similar situation was and in the debt markets. Index of government bonds Moscow exchange on Tuesday rose 0.2%, corporate bonds — 0.08%. More noticeable price increase in the last three days, noticeable in the segment of sovereign Eurobonds, which have risen an average of 1-1,5 p. p. In particular, the cost of paper “Russia-23 grew up with 106,5 108,3%, Russia-26” added to the price of more than 1 percentage point, reaching the level 102,38%. Long sovereign Eurobonds also show growth: the yield on the bonds “Russia-42” fell to a low for the last two years, 4.88% per annum.

The sanctions have helped Russia to adapt and to reduce dependence on American and European banks, because the country is isolated from them, explains the stability of the Russian market, head of research at Fund Ashmore Group, Jan Dehn. This according to analysts at Sberbank CIB, remarked: “the fluctuations of the market on Friday if something and indicate, in the first place on some protective properties that the Russian market has acquired after the occurrence of the Ukrainian crisis”, — stated in the review of the investment. Mainly, this is due to the massive outflow of capital which have since occurred, and reduce dependence on external debt. The sanctions regime, which limited the investors ‘ interest in Russian assets was partially saved Russia from the current turbulence, analysts of Sberbank CIB. And the consequences of Brexit for Russia can be positive, they think: for example, the demarche of the UK could lead to a split in the positions of European countries regarding anti-Russian sanctions, and they will be mitigated.

On average, developed markets in the first hours after the historic referendum lost 8-9%. The main index of the London stock exchange FTSE 100 fell by 8%. Events in the UK affected and Asian, and U.S. stock exchanges. By the close of trading Japan’s Nikkei 225 fell by 7.92%, Hong Kong’s Hang Seng fell by 5.65%, and the Shanghai SSE Comp to 2.87% At the minimum of the S&P 500 index fell more than 3.5%, high-tech NASDAQ index by almost 4%.

Two days (Friday, 24 June Monday, 27 June), the MICEX index lost more than 4%, down from 1919,27 to 1841,73 points.

Investors buy

Experts also attribute the rise in prices for Russian debt securities with the increased attention of investors who are trying to shift from British and European assets in more reliable tools. “The anxiety caused by the results of the referendum in the UK on Monday continued to boost sales in the British and risky assets, and investors favored the safety tools,” wrote Tuesday in his review of Sberbank CIB analyst Alexander Golynsky. In particular, according to his observations, investors actively traded the Russian Eurobonds.

“This is all the consequences of Brexit — before the vote, many investors went to cash and then again started to buy assets. We also bought the Russian Eurobonds on Friday, when all markets were falling,” — said the portfolio Manager of UK TKB investments partners” Igor Kozak. About plans to increase investments in dollar-denominated bonds of Russia and Brazil, Bloomberg said managing Europe’s largest Amundi investment company with assets of $1 trillion. Head of Department for debt markets of developing countries Deka Investment GmbH Peter Sutmuller said the Agency, which also took away assets that depend on Brexit less likely. “We have increased our position in Gazprom as the Russian state Corporation Brexit almost nothing to do”, he said.

Less risk

“The current situation in developed markets can be considered as more risky investments, because in the last few years they have shown significant growth. Investors have concerns that in the event of new shocks in Europe, they can show a significant drop,” says the head of trading “Aton” Yaroslav Podsevatkin. Investors increasingly focused on the problems of the Eurozone, and from this point of view, Russia and other emerging markets are more interesting for investments.

Investor interest in Russia is primarily associated with low value of assets. “In 2014, the prices of Russian stocks were also low, but they were not interested in someone, because investors did not see prospects for the economy,” explains the trader. Now the economy is recovering, inflation is declining, oil prices are stable, and there is the prospect of easing sanctions.”

Finally, investors attracted by the high yields that can be obtained by investing in Russian stocks. “Large funds, banks begin to buy Russian securities. It is a little money, but they are enough to raise our indices,” concludes Podsevatkin.

Oil helps

Another reason for the stability of the Russian market was the dynamics of oil prices: the price of a barrel of Brent crude rose to the middle of the day by 0.6% to $48,37. Against this background, the ruble strengthened against the Euro and the dollar on the Moscow stock exchange by 19:00 Moscow time the dollar was worth RUB 64,51, falling into the opening 93 kopecks, the Euro traded at 71,33. According to the analyst of “VTB Capital” Maxim Korovin, the ruble also supports the sale of exporters revenues for upcoming dividend payments. According to “VTB Capital”, the amount of the future payments will be about $12 billion.

Foreign markets are also gradually recovering from the shock of the results of the British referendum, points out in his comments analyst “Discovery Broker” Andrei Kochetkov. Some of them show even better results than not affected by the biggest storm in the markets of developing countries. For example, the index of “blue chips” EURO STOXX 50 Index rose on Tuesday by 2.27%, the broad market index EURONEXT 100 gained 2.21 per cent and France’s CAC 40 of 2.61%.

Volatility is the main risk

“In recent months, the Russian economy showed clear signs of recovery, which prompted large funds to open long positions on Russian assets — analysts write Sberbank CIB. — The inflow of capital from these funds was an important factor in the recovery of the stock market: since the beginning of the year.” However, the volatility in the world may not ignore Russia, they warn. Experts at Morgan Stanley also noted that the process of British withdrawal from the EU may increase the volatility of the markets that is significant for Russia.

“The results of the British referendum has provoked a number of new, not amenable to the calculation of reaction”, — stated in the overview of the Russian investment Bank. In the case of a new portion of negative news again, the ruble may weaken. According to the Bank, if the EU will not be able to limit the negative consequences of Brexit, the dollar may be close to the mark of 70 rubles.