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How Pandemic Changed Investment Banking and Investor Perceptions of the Russian Market
June 29, 2020 12:10

How has the pandemic changed investment banking and investor perceptions of the Russian market? The chairman of Citi's corporate and investment bank in Central and Eastern Europe, the Middle East and Africa, Irakli Mtibelishlivi, highlighted four key aspects of the changes.
Before the pandemic, Russian companies and investors in the Russian economy had to reckon with a number of factors, for example, a rather stringent sanctions regime against a number of companies and the risks of its tightening. And at the beginning of this year, investors received a very unpleasant surprise in the form of a pandemic and a sharp drop in demand and world prices for hydrocarbons and other commodities, which in turn hit the key sectors of the economy very significantly.
Winners and victims are obvious and known. Market participants associated with e-commerce, telecommunication service providers, and fintech won. The aviation industry, the oil and gas sector, commercial and hotel real estate, and traditional financial services providers were among the most affected. It is already obvious that the plans of the affected companies to launch new projects, investments, securities offerings, which existed before the pandemic, were postponed for 6, 9 or even 12 months.

The debt market is recovering faster than the stock market

The Russian market, like any market with an increased “beta coefficient” (risk coefficient), behaved accordingly in recent months: we have seen increased volatility, sharp jumps in one direction or another. Not machines make decisions, but people. People make both irrational and rational decisions. There is still a lot of irrational in the markets.

Traditionally, with stabilization and overcoming crisis situations, the debt market stabilizes earlier than the stock market, now in absolute terms it has returned to the levels existing before the pandemic, and for the highest quality issuers it has surpassed pre-crisis levels. But in relative terms - from the point of view of spreads - it became worse, since the benchmark rates, especially in US dollars, were very sharply reduced.

Russian stock market may fall in price

The stock market is recovering more slowly. We are seeing a gradual "return to normality." But here there is an important factor that relates specifically to the Russian stock market. For the past five to six years, it has been trading very cheaply; it is one of the cheapest and highest quality markets. Moreover, the dividend yield here is very, very high - for many companies it was above 10% per annum. In this sense, the fundamental expectations of investors from the Russian stock market have not changed due to the pandemic.

But in the coming year, we will see a decrease in net cash flows of companies and, as a result, a change in the dividend policy of individual companies. And here we should expect that prices for Russian stocks will decline in order to remain attractive to investors.

Indeed, many investors buy shares of Russian issuers of the traditional economy, because they expect a consistently high dividend yield. 

"This year we expect one or two IPOs of Russian companies. And we continue to search for potential candidates for an IPO. And before the pandemic, and now we continue to communicate with potential candidates. In the segments that have been hit hard by COVID-19, it will take a long time for companies and investors to recover and trust each other until everyone says to each other: “Yes, we trust this business, let's look at it.”
Talking with potential candidates, I realized that I am not a supporter of the theory that the world will change greatly after the pandemic. All that happened is a sharp acceleration of trends that arose before the pandemic. This is most evident in trade. The most significant, if not revolutionary, shifts occurred precisely in the food retail segment. Here we are witnessing just the explosive growth of e-commerce. And here it remains to determine which companies are capable of rapidly changing and growing, and which are not.
Investment banking business shrank in volumes

In general, over the past seven years, the Russian capital market, perceived as a locomotive of growth and a source of large deals, has become significantly less attractive. 2013 was a record year for the investment banking business in Russia - in terms of the volume of transactions, services and how much customers paid to investment banks. Since then, the investment banking business has declined by about half. It is difficult to make forecasts for this year, but it is obvious that in the future the process of interaction between banks, companies and investors will change.


Author: Anna Dorozhkina

Tags: Russian business coronavirus Russian economy   

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