The year 2023 will be remembered for a real rally in the stock market, a rapid increase in the key rate, which led to a change in favorites among investment instruments, namely the increased attractiveness of money market funds. The second half of 2023 is associated with a surge in initial public offerings and increased interest in replacement bonds. We invite you to recall the most striking events in the Russian market and sum up the results of 2023.
Growth exceeded expectations
One of the main investment results of the year – the Moscow Exchange total return index increased 1.5 times (+53.84%). Moreover, almost all of this growth was shown in the first seven months of the year. The result is more than worthy, especially considering that few people expected positive things from 2023. Among the market drivers are the return of companies to publishing financial statements and dividend payments, as well as the weakening of the ruble exchange rate. At the same time, now the Russian stock market has actually reached its fair values, taking into account the changes that have occurred in the monetary policy of the Bank of Russia and foreign trade, as well as the situation in the commodity markets.
The Central Bank of the Russian Federation doubled the key rate
In the second half of the year, we observed a rapid increase in the key rate. The path from 7.5% to 16% was covered in five steps. This increase was necessary due to increased inflationary pressures.
Doubling the rate supported the ruble exchange rate (the dollar fell from ₽100 to below ₽90), led to an increase in the cost of money, which caused a drawdown in the debt market and somewhat undermined the growth potential of the stock market. According to our estimates, 3200-3300 points is a fair range for the Moscow Exchange index over the next 12 months.
Money market funds are the new favorite
The rapid rise in interest rates and the prospect of their long-term retention have led to a change in investment priorities among private investors. There are not many instruments on the market that benefit from rising key rates: variable coupon bonds and money market funds. The latter, due to their nature, similar to a savings account in a bank, have gained particular popularity among private investors.
The numbers also confirm this. Thus, the net inflow of funds into money market funds exceeded ₽300 billion, and the assets of the largest of them, the Liquidity exchange-traded fund, exceeded ₽100 billion. The fund entered the top 5 in terms of trading volume among shares on the Moscow Exchange.
Shortage of foreign exchange instruments
Despite the stabilization of the ruble exchange rate in the second half of 2023 and high real interest rates on ruble bonds, the demand for foreign currency exposure among private investors remains high. However, the range of investment options is still extremely limited.
Expectations of massive replacement of Eurobonds of Russian borrowers and more than doubling of the volume of replacement bonds on the Moscow Exchange were not realized. The deadline for mandatory replacement has been moved forward by six months.
This supported the rally in the replacement bond market. Their average yield is already less than 7% and has the prospect of further compression in the absence of alternatives in the market for the mass investor.
In orderly rows at IPO/SPO
The surge in initial public offerings is another indicator that the market has climbed high. Current price levels are attractive for companies to attract additional capital, and for their shareholders to sell part of the business. In the second half of the year, we saw a number of both primary and secondary public offerings on the market. We can talk about a boom not only in IPOs, but also in SPOs – many companies are conducting additional issues of shares, attracting capital from the market.
At the same time, the private investment market turned out to be much deeper than it seemed to investment bankers just six months ago. We see that the market is digesting placements of ₽5−13 billion, although previously it seemed difficult to raise ₽2−3 billion. For example, shares Sovcombank sold like hot cakes – worth ₽11.5 billion.
This may be the first sign that the focus of private investors has begun to gradually shift from dividend stories to companies with growing businesses.
Redomiciliation – hard landing
In 2023, the process of re-registration of quasi-Russian companies in friendly jurisdictions began to be implemented. The VK company was the first to “move” to Russia. The absence of any restrictions on trading in shares of redomiciliated companies received in exchange for those purchased in Euroclear at a significant discount means the prospect of supply overhang in such names. The same VC, two months after the resumption of trading on the Moscow Exchange, is worth a quarter cheaper than before the decision to “move” was made by the company’s shareholders. This is largely due to redomiciliation.
The prospect of an overhang in the shares of redomiciled companies became unpleasant news at the end of the year for investors in depositary receipts on the Moscow Exchange.
Overhang over the market is the securities that can be thrown onto it. An overhang can slow the rate at which securities rise in value or exacerbate declines in their prices.
The Bank of Russia warned investors that the flow of securities from over-the-counter platforms to the exchange after the redomiciliation of quasi-Russian companies could cause volatility in the market due to increased supply.
What will happen next
Looking ahead to 2024, we expect the IPO/SPO boom to continue. With limited investment opportunities, the retail investor will continue to have an appetite for new names, especially from high-growth industries.
Passing the peak of the current key rate cycle will return investor interest in fixed coupon bonds. However, after trying money market funds, the mass investor is likely to continue to actively use this instrument.
Finally, one of the important innovations of the coming 2024 may be the widespread penetration of DFAs into investment portfolios.