Russia's Investor Base - The Locals Are Coming

Falling rates are pushing local investors into the equity market, and this trend is set to continue in the foreseeable future. In this note, we demonstrate that the rise of the local investor could reshape the entire equity market, lifting valuations, improving liquidity and lowering volatility. This trend also has meaningful implications for certain stocks, as retail investors' preferences differ materially from those of foreign fund managers. We have also performed a detailed analysis of retail investor flows to show which stocks they prefer the most.> Russians hold little in equities... Russian retail investors own only 7% of the free float and local institutions own 9%. Equity investments constitute only 2% of households' financial assets, much less than in any comparable economy. > ...but that is changing fast. Lower rates are forcing individuals to move into riskier assets, and the stock market has begun to witness meaningful inflows of retail cash. Low penetration and macro tailwinds mean that retail investor flows are bound to continue.> Local money will lift market valuations... The lack of a domestic investor base has been the local market's Achilles' heel and the key source of the Russia discount. GEM funds have consistently been overweight Russian equities due to structural issues, even when market sentiment was negative. This has limited their ability to expand Russia allocations despite improving market fundamentals. Hence, the market needs local investor flows for a rerating to materialize. > ... and bring the risk premium down. Unlike foreign funds, local investors do not have restrictions on asset types and hence are able to arbitrage the gap between low bond yields and still-high equity yields. The 7% dividend yield is more than enough to lure individual investors.> Market liquidity is improving and moving onshore. Now 70% of trades are executed in Moscow versus 50% in the past. Some 30% of trading volumes are generated by retail investors. We demonstrate that retail investors are acting as a shock absorber for the market. The numbers show that retail investors are net sellers on days when stock prices rise and buyers on the dips. The increasing role of individual investors will likely further reduce market volatility.> Individual stock preferences. We show that retail investors tend to prefer dividend stories and have a much higher tolerance for low liquidity. Their favorite names include Gazprom, Sberbank prefs, Severstal and Surgut prefs. Retail investors are also disproportionally interested in utilities and industrials.