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Equities A dip into the public pool to raise cash
Offerings seen as a way forward, but investors hesitate
With the burgeoning Russian debt market looking ever more expensive, investors are taking another serious look at IPOs.
TIM GOSLING BUSINESS NEW EUROPE
At the start of 2010, as much as $20bn worth of Russian stock was expected to go public. However, with equi- ties stubbornly refusing to follow bond markets – which have been winding tighter for more than a year now – the market has seen just $3bn or so of this equity. The tap is now turning back on. On the one hand, some companies have run out of wriggle room and can no longer avoid having to hunt cash to reduce their debt. For most, the bond markets are still too expensive, and the banks are tightening require- ments on borrowers. As Peter Westin, chief equity strate- gist at investment bank Aton, suggests: “In short, to some extent it’s a natural process as we come out of the eco- nomic crisis.” Yet others clearly sense that emerging market investors are finally ready to cash in the profits they’ve made in markets such as China, India, South Africa and Turkey to take a chance on Russia’s cheap stocks. As Chris Weafer, chief strategist at Uralsib, wrote on October 29, over the previous week, Russian funds
Banking & Finance MOSCOW BLOG
A bullish stance to his internet group’s IPO in London this month paid off for Mail.ru
general director Dmitry Grishin
attracted the highest inflows of any emerging market for the first time since May. Tom Mundy, chief strategist at Otkritie Financial Corpo- ration, says: “There’s already cash on the sidelines that could be tempted by some of these offers.” That money won’t rush wil- ly-nilly into these deals, how- ever. Investors remain wary of Russian IPOs, and with good reason: their track
record is horrendous. “I think the market will be very cyn- ical,” says Mr Mundy. In fact, at the end of Octo- ber, not a single Russian com- pany that listed in 2010 was currently trading above its issue price. IRC, which was first out of the gate in Octo- ber, found out quickly just how suspicious investors re- main: the non-precious met- als division of Petropavlovsk slashed its proposed $500m
Investment Fund managers looking to Western retailers A handhold for small speculators
Leading Russian banks are setting up funds that offer Western standards of protection to small investors seeking a way in.
DMITRY DOVLATOV BUSINESS NEW EUROPE
Russia’s stock market is usu- ally either one of the three best performing markets in the world – or one of the worst. Until now, these mar- kets have been the preserve of institutional investors with a high appetite for risk, but the appeal has broadened as the market recovers. “Sentiment has changed. Cli- ents are calling us again ask- ing about Russia, and we’ve been seeing significant fund flows over the past three weeks,” says Vladimir Savov, head of research at Otkritie Financial. What is new is Russian fund managers are now specifical- ly targeting retail investors in the West. The new funds are Undertakings for Collec- tive Investment in Transfer- able Securities (UCITS), a classification that was estab-
lished in 1985 by the EU of- fering a high degree of in- vestor protection, making them especially suitable for small investors. The Stockholm-based East Capital is the granddaddy of eastern Europe’s UCITS re- tail funds. The company set up its flagship Russian Fund in 1998, and today has about half a million investors with a total of €4.6bn under man- agement. As little as €20 will buy a piece of the action; the fund is sold in 14 countries via a list of partners that in- cludes banks, insurance com- panies, and independent fi- nancial adviser networks. Despite the market crash two years ago, that saw three quarters of Russian equity’s value destroyed, East Capi- tal’s Russian Fund was still the best performing UCITS fund in the world over the last decade, returning 1,500pc to investors. Indeed, four out of the five best performing funds in the world over the last decade were Russia-spe- cialist funds. “It is clear that the appetite
for emerging Europe is back, as inflows have been picking up,” says Karine Hirn, one of the co-founders of East Cap- ital. “Having an exposure to emerging markets used to be only reserved to those few with higher risk appetite, but it’s becoming a must now in investors’ portfolios because of the somewhat gloomy fu-
Troika Dialog launched a Bric fund in October that will invest in the leading emerging markets
ture for Western capital mar- kets and economies.” The latest entrant to the game is Renaissance Asset Managers (RAM), which launched a family of funds in October that covers Emerging Europe and Afri- ca. RAM is part of the Ren- aissance Group that includes Renaissance Capital, a vet- eran Russian investment bank, founded by New Zea- lander Stephen Jennings.
Among its vehicles are two Emerging Europe funds that invest into Russia and its neighbours, while a Russian debt fund is also planned. All RAM’s funds have the UCITS stamp of approval, and the company is in the process of getting “passports” for each Western European country. Most of the funds will go on sale to retail investors in the new year, although they’re already available to institu- tional investors. “The emerging markets – and especially Eastern Europe and Africa – are coming of age, and we are at the start of the next super cycle,” says Plamen Monovski, CIO of RAM. “The markets are vol- atile, but even in the worst non-crisis year, the poorest performance was a gain of 20pc; and there were only two crises in the last 13 years.” At the same time, Russian mutual fund pioneer Troika Dialog is expanding its reach, and has launched several new funds targeting retail in- vestors worldwide and hopes
to get UCITS certification by year’s end. The bank launched its Russian mutual fund in 1997, and remains one of the country’s biggest domestic fund manager. “One of the things that we learnt from the crisis is that diversifica- tion is good, especially geo- graphic diversification,” says Anton Rakhmanov, Troika
asset management head. Troika launched a Bric fund in October that will invest in all four leading emerging markets. It already has a family of funds that invest into Russian stocks, bonds, utilities, infrastructure and small cap companies, which will be converted to UCITS by January.
Russian Fund v the market
offer in Hong Kong by 50pc in the face of low bids. Some suggest that the offer suffered from a lack of en- thusiasm for Russia’s opaque and heavily taxed natural re- sources sectors. “[They’ve] pulled down the [price/earn- ings] ratio for a while,” says Mr Westin. “If you believe in the oil price, you don’t go for Russian oil companies, you go for the domestic-facing names” – especially as they
too now offer “a significant discount to emerging-mar- ket peers”. Mr Mundy picks out retailer O’Key as one of the most interesting names. “Retail is a sector that peo- ple want exposure to – there are relatively few names to choose from, and consump- tion numbers are rising thanks to the government’s financial support.” Indeed, although some ana- lysts continue to suggest that
the St Petersburg grocery re- tailer looked 5pc above its fair value, even at the bot- tom of its proposed pricing range of $9.9-$12.9 per GDR, the company managed to close the bid book on No- vember 2 at $11.00 – a much better performance than any other issuer so far this year. That said, the company still fell 17pc short of the $540m it had originally hoped for. Most bullish of the whole batch has been internet group Mail.ru
, whose initial pric- ing range for its debut in London values the company “notably higher than most international peers”, accord- ing to Konstantin Cherny- shev of Uralsib. However, driven by the com- pany’s positioning as a high- calibre tech stock, and offer- ing exposure to both the consumption story and “Rus- sia’s human capital” suggests Mr Mundy, the bid book was filled towards the top of the range in early November. Yet at the same time, others continue to struggle with the persistent gap between ex- pectations and the refusal of investors to pay top dollar. “Companies have to come to the market with transparen- cy and a healthy discount,” Mr Mundy warns, “then some of these sales should go well.” The same mantra was heard at the start of the year, but, after the first few issues proved the point, the pipe- line promptly dried up. It seems unlikely then that every one of the companies that have announced plans to list in the near term will actually go through with it. However, with a $50bn pri- vatisation programme pen- cilled in for 2011-15, it may be the only opportunity many will get.
Fears for the rouble as QE2 sets sail overseas
SPECIAL TO RN A
merica’s Federal Reserve Bank launched QE2 in November and
dumped another $600bn into the US economy, nom- inally to stimulate it. In re- ality, the money will have little impact there, with much of it instead heading abroad. On the day the Fed launched QE2, all 50 of the MSCI World equity sectors soared. Currencies, such as the pound and the euro, reached new highs against the dol- lar, and the world’s leading futures exchange, the Chi- cago Board of Trade, had its busiest day in history. While the global outlook re- mains gloomy, look to the east and Russia, where things seem very different. Yet, despite an increasing- ly frothy capital market in Russia, no one would say there was an economic boom underway. If any- thing, economic growth has disappointed in the second half of the year, and sectors that were expected to lead the country out of the re- cession are doing OK – but no more than that. Next year looks like it will be bet- ter, but a return to the pre- crisis 6pc-plus rates now seems a pipe dream. The froth on the market is being driven by the mountain of money that is spewing out of the US central bank and running downhill into mar- kets such as Russia, where there is real growth and real demand for capital. What is worrying is this movement of money is not driven by demand and sup- ply, but is a function of the very distortions that caused this crisis in the first place. The Americans complain about the Chinese holding the yuan down at artificial- ly low levels to allow them to keep their export ma- chine running. However, the
British business still blind to potential of the regions
RUSSO-BRITISH CHAM- BER OF COMMERCE
B SOURCE: WWW.EASTCAPITAL.COM
International Bilateral trade growing
Inching into better economic pastures
Business and political players are looking to inject fresh impetus into flagging trade after the Russo-British political reset.
VICTOR KUZMIN RUSSIA NOW
The Russo-British Chamber of Commerce switched the slogan of its Russia Talk forum from last year’s “Back to Business” to a more meas- ured “Trading Experience” in October, when more than 250 business leaders met in Moscow. On the plus side, the trade volume between the two countries showed an increase of 20pc in the first eight months of the year. While not nearly enough to offset the 50pc drop of 2009, the growth gave rise to cautious opti- mism, especially after the low-key Medvedev-Cameron “reset” of political relations
at the leaders’ recent talks in South Korea (see page 1). With an end in sight to the prolonged doldrums in bilat- eral trade, major players are also stepping up economic activity: TNK-BP announced this month that it would in- vest $3.8bn over the next three years into its gas busi- ness in Russia, reported Re- uters. The company is expect- ed to produce 13bcm of gas in 2010 from 143 fields. At the diplomatic-economic level, UK business secretary Vince Cable concluded his visit to Moscow last week, hailing the talks as a “real breakthrough in our rela- tions”, reported the Moscow Times. Cable also mentioned a “long and deep discussion” on Skolkovo, Medvedev’s hi- tech hub, which offers an op- portunity to promote “wide collaboration in the technol- ogy field”.
asil Fawlty would have been proud of the answer. When I came downstairs in
the Hotel Tsentralnaya in Nizhny Novgorod on a chilly morning in late Oc- tober, I asked why there had been no hot water for my shower when I got up. “Because lots of people want to take a shower in the morning,” replied the girl at reception, in a tone that suggested my question was absurd. I was visiting the city to take part in the annual In- ternational Business Forum. The forum is a showcase for industry in the Nizhny Novgorod Region, one of the more forward-looking regions in Russia. Nizhny is one of the cities with a one million-plus population. It is well-placed geographically and for lo- gistics (on the Volga River), and only an hour’s flight from Moscow; and it was one of the first Russian cit- ies to take advantage of the opportunities offered by the collapse of the USSR and, with it, the centralised com- mand economy. In 1990, the old Russian name of Nizhny Novgorod was restored, and the once closed city was opened to foreigners. Western compa- nies began to take interest, and a British trade fair was held here in 1997 in the his- toric Yarmarka exhibition centre where the annual forum is now held. German companies arrived in their droves. The Japanese moved in. And the follow-up to the trade fair by the British? Well, er, the executive di- rector of the RBCC visited this year’s Business Forum… We Brits do still have a se- rious problem getting our
heads round the idea of doing business with Russia. Thanks to huge British investments in the oil and gas business, we boast that we are the sin- gle biggest foreign investor into Russia. But when we look at small and medium busi- nesses, we’re way off the pace. In Europe, Germany, Italy and Turkey are well ahead of us. Even though Japan has still to sign a peace treaty with Russia 65 years after the end of the Second World War, Jap- anese business is still doing very nicely in Russia. Maybe it’s our inherent con- servatism which prevents British companies from be- coming too heavily involved in Russia. Maybe it’s the fact that too many stereotypes still dominate our thinking. Or maybe we’re just too spoilt and like our creature comforts too much – like hot showers in the morning. The Hotel Tsentralnaya may be very convenient for the Yar- marka, but it did feel like stepping back 20 years to the Soviet Union. It wasn’t just that the water system couldn’t cope with 200 peo- ple wanting an early morn- ing shower: the half-hour wait to check in at 10 o’clock at night; the décor; the small, threadbare item in the bath- room which passed for a towel; all of these things, too, reminded me of nights spent in Soviet hotels in the Sev- enties and Eighties. As if that wasn’t enough, the view from the hotel window to the Yarmarka also took in one of the largest statues of Lenin I have seen in post- Soviet Russia. Ironically, his outstretched hand, pointing at the hotel, seemed to say, “Look! The Soviet Union is still alive!” Nizhny Novgorod is a city with great potential, as I a often tell British business. I shall certainly be back there, and would love to take a business delegation – but we’d be sure to stay in a dif- ferent hotel.
Fed has just done the same things: QE2 looks like noth- ing more than an attempt to manipulate the dollar lower to reduce some of the coun- try’s debt and print a way out of its budget deficit. QE2 has created a wall of money that is looking for a home. In the short- to medi- um-term this is good for in- vestors, as it is driving down the cost of borrowing for Russians and is driving up the value of equities. But in the long term it is danger- ous, as debasing the dollar will debase Russia’s hard currency reserves – Russia has more dollars in govern- ment vaults than any other European country – that will in turn undermine the sta- bility of its economy and un- dermine the global recover. Russia is particularly vulner- able to these sort of shenan- igans as, since 2006, it has run an open capital account. While other emerging mar- ket countries are talking about putting controls on the flow of capital to keep some of this money out (they are worried about the apprecia- tion of their currencies), Rus- sia has stuck to free market principles and refused to put any controls on capital. But the Kremlin is becom- ing worried about the games other countries are playing, and, ironically, has become the voice of reason on the in- ternational stage. Finance minister Alexei Kudrin stringently warned the G20 members during a meet- ing in November that they must not “artificially weaken” their currencies and set off a currency war. And president Dmitry Medvedev is pushing for G20 members to consult with their partners before doing anything that will af- fect their currency’s value. Can this really be the same government which only 10 years ago was battling against 1,400pc a year hyperinflation and was forced cut three zeros off the numbers on bills because the numbers were getting too big?
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