Better market conditions needed to bring investors back to Russia, says BNY Mellon
An improvement in global market conditions is the only way to bring investors back to Russia and other risky markets, says BNY Mellon.
This year, the firm has seen a drop in demand for Russian stocks from foreign managers investing the country.
Graham Marshall (pictured), managing director for Russia & CIS in the depositary receipt division, explains that this is evident from the fact that managers are converting their depositary receipts in Russian companies into local shares.
Depositary receipts are a financial instrument used by banks to allow foreign companies to publically trade their shares abroad and list them on local stock exchanges.
For example, in order to invest directly in companies based in countries that cannot list their shares on the London Stock Exchange, such as Russia, an investor would have to go through complicated procedures. A depositary receipt gives foreign investors much easier access to the market.
Many issuers from the BRIC region issue their stock through depositary receipts to make it more attractive to foreign investors. Marshall says emerging regions, including Russia and the CIS region, are the largest growth market for BNY Mellon.
Many fund managers based in the UK and other jurisdictions have found it easier to access the Russian market through depository receipts. Much of this business goes through BNY Mellon as the largest global provider of this service.
However, in the past 12 months demand from international investors has severely diminished.
Marshall says: “There is enough volatility and risk in developed markets, so we have seen investors pulling out of emerging markets this year to reduce their risk exposures.”
IPO activity in Russia has been far from robust this year, too. If last year Russian companies completed five or six IPOs, this year only one is worth mentioning.
Earlier this year, Russia’s largest bank Sberbank completed a successful secondary public offering, raising over $5bn for 7.6% of the company.
Another large Russian company, mobile phone operator Megafon, is expected to go to IPO by the end of the year. But even if this happens, 2012 will have seen a third of the IPO activity compared to last year.
However, the balance sheets of Russian companies remain in good conditions. They have much less debt and structural problems than those based in the developed markets.