One of the best managers, according to Forbes, answers the question “in a million”

Very often, acquaintances or clients ask the question whether it is worth investing in the Russian stock market now. A good friend of mine always, hearing a similar question, said that this was a million-dollar question, and then he thought about it and added, and maybe even a billion, depending on the size of the position. We live in a changing world, and there is no clear answer to this question, so I will just try to share some of my thoughts.

The yield on Russian sovereign Eurobonds, which serve as a benchmark for interest rates, is at historically low levels, while dividend yields have recently increased significantly. Thus, 3 development scenarios are possible:

1) yields will increase, Eurobond prices will fall;

2) dividend yield will fall;

3) stock prices will rise.

A fall in Eurobond prices seems unlikely while repo rates for this instrument are Libor+50 basis points – Libor+100 basis points. A drop in dividend yield is also unlikely, since the forecasts for the main companies do not imply a significant decline in their profits, while the share of profits allocated to dividends is growing. The third scenario seems most likely—stock prices will rise.

The question arises why, despite such a remarkable drop in sovereign Eurobond yields and at the same time an increase in dividend yields, share prices are still not showing the most confident dynamics. It seems to me that the reason is the constant and significant outflow of capital from the country.

Thus, according to the Central Bank, net capital outflow amounted to $34.4 billion in 2010, $80.4 billion in 2011 and $43.4 billion in the first half of 2012 alone. It turns out that the Russian economy is experiencing a severe capital shortage, which negatively affects the attractiveness of investing in the stock market.

The only economic way to stop capital flight is to create conditions in which capital will feel comfortable. I am very pleased that the country’s leadership understands this and sets the goal as one of the main tasks to rise from 120th to 20th place in the World Bank Doing Business ranking by 2020. It is clear that from awareness of a problem to its solution is a long way, but it is difficult to argue that without awareness there can be no solution, and the fact that such awareness has appeared is extremely positive for the stock market.

Summarizing the above, we have a high level of dividend yield compared to the level of interest rates, in other words, we are simply faced with an inexpensive market, on the one hand, and the need to improve business conditions, on the other. This generally does not help much in answering the questions of whether it is worth investing money and how long an inexpensive market can remain inexpensive. Therefore, let's try to take a different route and look at the feelings of market participants.

The consensus on the market is extremely negative. The word “crisis” is always on the front pages of newspaper headlines, various news items, conference topics, etc. I have seen examples of all four combinations on the market:

Two consensus:

attitude towards the market is positive and the market is growing;
the attitude towards the market is negative and the market is falling;

Two contrarians:

the attitude towards the market is negative, but the market is growing;
attitude towards the market is positive, but the market is falling.

In my experience, consensus movements are extremely small - 10-20% on the index, while contrarian movements are usually many times more powerful. I do not rule out that the market can both rise and fall, but it seems to me that the possible scale of the growing movement in the current situation is significantly higher than the possible scale of the fall. Therefore, from the point of view of the risk/return ratio, the Russian stock market remains attractive for investment.

Is it worth investing in the Russian stock market?