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

An analyst of Finam FG about the soon decline of popularity of open-end funds

Russians have invested a record amount of money in open-end funds — in September, the net capital inflow to these funds was 8,4 billion rubles, or 3 billion more than in August. It is the highest figure since the start of the years. Moreover, the net capital inflow to open-end funds has been seen for the fourth month in a row, nearly 17 billion have been invested. Though the net capital outflow from the funds from February to May was 45,8 billion rubles. In an op-ed column for Realnoe Vremya, analyst of Finam FG Natalia Malykh reflects on the reason for the popularity of open-end funds and for how long it will last.

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 current situation is not an ordinary economic crisis but a transformation of the economy with the ongoing large-scale military conflict, therefore it is logical that the appetite for the risk is different from what it used to be. This is why investors are being careful and still prefer less risky options. They opted for bond funds that have received the main amount of money. Bonds have been in demand this year not only as a low-risk product but also because of the cycle of a fall in the key rate of the Central Bank from a 20% peak. And it was a more profitable option in the market of fixed income instrument — even state bonds offered a higher rate than large banks.

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.

Natalia Malykh

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The author’s opinion does not necessarily coincide with the position of Realnoe Vremya’s editorial board.