Natalia Malykh: ‘The sanctions, growth of taxes and mobilisation will provoke a flight of capital from open-end funds’

Not an ordinary economic crisis but a transformation of the economy

Since early August the stock market has started recovering following bonds because of the geopolitical lull and low interest rates, and different investors believed in the prospects of the market. Open-end funds started to receive more money from individual investors, and the inflow has hit the record-high this year in September — 8,4 billion rubles. Though compared to 2020-2021, the amounts of investments are still low.

The companies that saved the practice of dividend payout are well rated

The shares, in turn, lost their former glitter after the start of the special military operation. Investors understand that investment yield will be mainly determined by Russia’s successes in the confrontation with the West. The risks are high now, but at the same time they are weakly compensated in the mid-term. Many companies suspended dividend payout, and our market stopped being a global leader in dividend profitability. Some companies disclose little information because of the sanctions. Therefore shares got their part of the capital, but it is still little compared to the pre-crisis times despite their low price.

Several factors facilitated some revival in the demand for shares. After a series of falls in the Central Bank’s rate, the profitability of bonds already almost fully fulfilled their potential for growth, while banks began to run short of “anti-crisis” deposits that were opened at a high rate at the beginning of the special military operation. And investors started to look for more interesting options. Gazprom’s decision in late August to pay interim dividends for 2022 with a more than 20% yield, which is much higher than bon and deposit rates, notably encouraged an inflow of money in the stock market. Dividends speak volumes, and we see that the companies that saved the practice of dividend payout are rated better than others in general.

We are going to see a different picture from October

Though positive dynamics on the capital flight to open-end funds have been noted in the last four months, we can see a completely different picture in October, with an outflow of money. Several events that are negative for the market and disrupted the fragile balance took place in the last decade of September.

The Moscow Exchange Index has collapsed by 20% by the end of the month since 20 September, once the fall reached 25% after messages about referenda in Southeast Ukraine, partial mobilisation and the government’s decision to raise the debt burden for feedstock exporters (oil and gas, fertilisers, coal) to finance public expenses from the surplus profit. The sanctions that followed are not very strict, but a rise in taxes will have a greater effect on market capitalisation, they will cut companies’ future possibilities of paying out dividends, and the partial mobilisation after which one can expect consumers to switch to a saving mode.

Consequence, we can see a different picture from October, especially in shares. Bonds, in turn, especially public bonds, are less vulnerable in this regard because of a more predictable flow of coupons and a low risk.