2 min read


A stupid mistake misframes this morning's column

I badly misstated my train of thought and mangled the point I struggled to make in the main column:

“The RTS is still below 2013 highs and as you can see from the drop in 2020 vs. that observed in MOEX, it’s more exposed to the commodity price cycle because foreign investors want to hold stock in Russia’s exporting, more internationalized firms and they tend to be more clustered towards extractives. MOEX holds a broader basket of firms in areas of the Russian economy that aren’t as cyclical, or else benefit from the adoption of newer tech, import substitution policies, and market consolidation.”

RTS and MOEX are the same by listings and weighting, they’re only distinguished by being dollar denominated vs. ruble denominated. I shouldn’t have said they hold different assets (which I clearly implied) but rather that the currency-denomination of the earnings of the companies involved — which corresponds to export industries and commodities — and their primary markets — internal vs. external — would be reflected to some extent by the two indices. Apologies for the inaccuracy on my part and thanks to Jake Cordell for kindly flagging it. The bigger point would be that ruble-earning firms operating on domestic markets that aren’t following the external commodity cycle would have a different equity profile than the firms listed in dollar terms. Some value increase could be from investors swapping between the two, but given the ruble’s devaluation, foreign investors aren’t taking the risk and I doubt most domestic investors were that keen on buying Russia shares dollars save as a hedge. Sanctions play a role, but I think they’re a bit overblown for this stuff. The effect of that distinction in terms of earnings would be that the basket of firms held in both would perform better on MOEX in many instances, including Russian oil & gas firms, and the mentioned factors would help inflate equity values for ruble-denominated assets issued by firms primarily earning on the Russian market. Those increases, however, wouldn’t reflect actual economic growth in broad terms though. It’s not just about the exchange rate differential for the performance gap. It’s that Russia’s attempts to insulate the economy from external shocks and supporting SOEs when it wishes can inflate domestic equity values without corresponding to better economic growth, worsened by market consolidation and larger firms growing at the expense of SMEs, thereby producing asset price inflation that harms savers struggling with declining real incomes and forced into riskier financial assets to realize yield. Hopefully that makes more sense. I really need to get a better sleep routine going, but COVID has collapsed my sense of space and time.

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