The stock market reflects the country’s economy and represents the most effective source of raising capital for companies and enterprises. For investors, the stock market provides an opportunity to optimally manage their savings.
There are two main forms of participation in the company’s business: directly – through the purchase of shares, and indirectly – through the purchase of bonds. The stock market allows citizens to receive the right to a part of the profit of the most successful companies through the acquisition of shares, or to lend money to enterprises at a certain percentage by purchasing bonds. In Russia and all over the world, these are the securities that are most attractive for investing free cash.
Long-term growth trends in the Russian economy are an increase in the scale of activity of domestic companies and an increase in the country’s gross domestic product (GDP).
Over the past five years, the profits of companies whose shares are traded on the market have doubled. In 2013 and 2014, the volume of profits decreased, over two years showing a decline of 44%. In 2015, the profit of public companies amid the devaluation of the ruble soared 72.6% (to 7.5 trillion rubles). In 2016, a further weakening of the national currency also supported corporate profits, which in this period grew by another 70.6% to 12.8 trillion rubles, updating the 2012 maximum. At the end of 2017, the decline in company profits exceeded 19% (to the level of 10.3 trillion rubles). In 2018, according to our estimation, the corporate profits of companies increased by 33% to a record of 13.7 trillion rubles.
Starting in 2010, the capitalization of the Russian stock market stagnated for almost five years, while the net profit of Russian enterprises increased 2.7 times by the end of 2017 (significant growth occurred in 2015 and 2016 against the backdrop of the devaluation of the ruble), and nominal GDP Russia increased by 2.4 times. Only in 2015 began the growth of the national stock index, while according to the results of 2015-2016, the Moscow Exchange Index grew by 60%. In 2017, the capitalization of the stock market decreased by 7%, and by the end of 2018, it grew by 13.4%. At the end of 2018, the P / E coefficient of developed-market stock markets averaged 16.1, P / E S & P500 exceeded 20, while the P / E of the Russian stock market was at 6.8.
The level of monetization of the Russian economy (M2 / GDP) remains extremely low. At the end of 2008, this figure was 32.5%, and since 2010 it has been in the range of 39-43%. At the end of 2018, the monetization level was 45.5%. At the same time, the value of this indicator in developed economies ranges from 80-100%, and in the growing economy of China – about 200%. In fact, in these conditions, the Russian economy has enough money to conduct current activities, but it is not enough for a fair assessment of the value of assets and investments in fixed assets.
In addition, at the end of 2018, the ratio of money supply and capitalization of the Russian stock market was about 115%. Such a high level of M2 / Capitalization indicates that currently, the domestic stock market is still interesting for acquiring assets.
From a fundamental point of view, an increase in the total volume of corporate profits of companies included in the Moscow Exchange Index in 2019 should lead to an increase in the total capitalization of companies to 15.2 trillion rubles. (9.8 trillion rubles at the end of 2018).
According to the assessment of the country’s balance of payments provided by the Bank of Russia, direct investments by non-residents in the non-banking sector of the country’s economy in 2018 amounted to only $ 1.9 billion, which is 14 times less than in 2017 ($ 27.1 billion). An inflow of $ 8.2 billion was observed in the first half of the year, an outflow of $ 6.3 billion in the second half of the year in 2019. At the same time, the outflow of portfolio investments of non-residents from assets of the non-banking sector of the Russian Federation fell to $ 0.5 billion in 2018 from $ 4.5 billion in 2017. The banking sector, being in severe conditions of external financing, was forced to continue paying off external debt. Payments for 2018 amounted to $ 23.9 billion.
In the coming year 2020, the main driver of the growth of the Russian stock market will be a decrease in interest rates, an additional factor will be an increase in corporate profits amid economic growth. In addition, an increase in investment in the country’s economy is expected, as well as an increase in household incomes and a change in the structure of expenditures (reduction in the share of consumption).
High stock market returns can lead to increased public interest in investing in securities.
Additional factors reinforcing this trend may be the mechanism of individual investment accounts (IIAs) and the practical implementation of decisions to further increase dividend payments by companies with state participation, as well as the orientation of management to increase capitalization and return on equity, as the main criteria for evaluating the performance of large companies with state participation.
Conclusions on investing in the stock market in Russia:
- the Russian stock market is still one of the most undervalued markets in the world with the highest dividend yield;
- the main drivers of growth of the Russian stock market in the coming years will be: continued economic growth, increase in corporate profits, lower interest rates, as well as focus on capitalization and measures to improve corporate governance in individual joint-stock companies;
- high stock market returns can lead to an increase in public interest in investing in securities;