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Roland Nash presentation Roland Nash presentation Presentation Transcript

  • The Great Financial Revolution April 2006 Renaissance Capital Roland Nash Head of Research +7095 258 7916
  • The IPO Boom
    • For a decade, the market asked when there would be new companies coming to market?...
    • In 2006, we got what we wished for!
  • The IPO Boom
    • Between 1992 and the end of 2004, Russia had seen 13 IPOs, raising around USD1.4 bn…
    • … in 2005, issuance rose to USD4.3 bn…
    • … and in 2006, there will be around 28-30 IPOs, raising around USD25 bn, or more!
    Number and Aggregate Volume of IPOs $4,278 $24,260 5 33 28 8 7 1 2 1 1 1 $5,320 $500 $618 $16 $222 $323 $56 $111 0 2000 4000 6000 8000 10000 12000 25000 1996 1999 2000 2002 2003 2004 2005 2006 2007 2008
  • The IPO Boom
    • From being an irrelevance, Russia’s equity capital markets are now among the hottest in the world.
    • By the end of 2006, Russia will have…
      • The largest stock in the emerging market universe (Gazprom)
      • The fourth largest equity issuance in the world this year
      • The largest single IPO in history.
    Equity Issuance By Country, in 2006
    • Russia’s Financial Revolution…
  • Stable Economics - Generating Excess
    • Partly due to remarkably high oil prices, and partly due to domestic stability dissuading capital flight…
    • … Russia has been generating enormous twin surpluses –
      • 13% of GDP current account surplus in 2005
      • 7% of GDP budget surplus in 2005
    Budget Revenues vs Budget Surplus Export Revenues vs Trade Surplus Source: State Statistical Committee, Renaissance Capital Source: State Statistical Committee, Renaissance Capital
  • Wealth Generation
    • There has been a truly phenomenal period of wealth creation…
      • Despite paying down USD15 bn of Paris Club debt, USD5 bn of IMF debt and USD5 bn of Eurobonds…
      • … Russia has still increased the stabilisation fund by USD35 bn in 2005
      • Meanwhile, reserves are growing by USD1 bn per week.
    Reserve Accumulation Stabilisation Fund
  • Liquidity Growth And Asset Prices
    • One consequence of the excesses generated has been a very rapid growth in the money supply…
    • … M2 has been growing by 30% plus per annum leading to…
      • Asset price growth
      • Price growth
    Longer Term Inflationary Trend Shorter Term Inflationary Trend
  • Weak Banking Sector
    • At the same time as all this liquidity, Russia suffers from a weak and inefficient banking sector…
    • … with one state dominated institution responsible for much of the job of managing the allocation of Russia’s liquidity.
    • As a result, intermediation by the banking sector has been very poor.
    Assets of the Russian Banking Sector
  • The Markets Step In
    • The demand for capital, however, is extremely high…
      • There has been enormous under-investment for the last 20 years
      • A lot of new sectors are emerging and growing very rapidly and are unable to sustain growth through retained earnings
      • Households are still very under leveraged compared to emerging market peers.
    • There is, therefore, a situation of…
      • Excess demand for capital in much of the economy,
      • Excess supply of capital in the natural resource sectors
      • And a severe bottle neck between the two
    • This has provided a very large incentive to intermediate on behalf of the weak banking sector…
    • … catalysing a veritable financial revolution in domestic Russia.
  • Domestic Debt
    • The revolution began in the debt markets when corporates recognised that they could borrow Russia’s liquidity without having to go to Sberbank
    • The market has exploded since…
      • Outstanding debt has risen from USD200 mn in 2002 to USD20 bn today.
      • The average size of issuance has risen from RUR0.5 bn to RUR3.0 bn
      • The average duration of issuance has risen from 9 months to 36 months
      • The number of issuers has risen from 77 to 255.
    Domestic Debt – Market Size Vs Turnover Yield Dynamics
  • Domestic Funds
    • At the same there has been an explosion of personal finance and fund management structures to utilise the increased liquidity…
      • Mandatory car insurance has helped to kick-start a USD3 bn insurance fund market
      • Pension fund reform has begun to have an impact as Russia crawls from pay as you go to fully funded
      • Asset management firms have expanded rapidly
      • Consumer finance and mortgage possibilities have mushroomed
    Funds Under Management, USD bn The Rate of Growth of Personal Finance
  • Push Factors – Performing Market
    • It is not only the superb liquidity conditions, demand for capital and flourishing investment banking industry which is causing the financial revolution…
    • … there are push factors too.
    • The first is the superb performance of the market…
    Performance of the RTS since inception
  • Push Factors - Growing Government
    • The other is growing government…
      • December 2005 – UES acquires 22% stake in Power Machines taking its ownership above 25% for USD101 mn
      • November 2005 – Gazprombank acquires a major stake in OMZ (up to 42%)
      • October 2005 – Rosoboronexport purchases a 62% stake in Avotvaz for USD700 mn
      • October 2005 – Gazprom raises its stake in Sibneft from 3% to 73% for USD13.1 bn
      • July 2005 – The government formally raises its stake in Gazprom above 51%
      • December 2004 – Rosneft purchases 76.8% of Yuganskneftegaz for USD9.3 bn
      • September 2004 – Vneshtorgbank acquires 25% plus 1 share of Promstoibank St. Petersburg
      • August 2004 – VTB purchases 85.8% of Guta Bank for a symbolic USD34,390.
    • Consequences – The Future Shape Of Russia’s Equity Markets
  • IPOs By Sector
    • The shape of the equity market is shifting rapidly with the number of IPOs
    • There will be 17 IPOs in the consumer sector, compared to 2 in oil and gas.
    Number Of Deals By Sector
  • Breakdown Of Market By Sector Russian Market in 2003 Russian Market in 2006 before Gazprom rebalancing and Rosneft Russian Market in 2006 before Gazprom rebalancing and Rosneft
  • Russia Rising In The MSCI
    • Russia’s position within the all important MSCI index is changing from a virtually irrelevant USD67 bn in 2003...
    • ...to a very impressive USD725 bn in 2006!
    Russia’s Changing Position In The MSCI Index, Number of stocks, and USD bn
    • Risks
  • Valuations
    • One of the most important reasons to have bought Russian securities over the last seven years is because they have been cheap…
    • … this is no longer the case.
    EMBI Spreads Versus 2006 P/E for Oils Source: IBES and Bloomberg
  • Valuations?
    • If Russia is broken down by sector, then it is clear that Russian equities now trade at quite a large premium to emerging market comparables
    Consensus Cross Sector Valuations, p/e by sector Source: IBES
  • Stable Politics?
    • A sometimes overlooked reason for the performance of Russian equity is the stable condition of Russian politics…
    • … stability has encouraged the return of domestic capital on which much of the economic growth has depended.
    • But Russian politics enjoys eight-year cycles…
    • … and the current cycle is due to end next year.
    Popularity of Russia’s Politicians Political Party Popularity
  • Conclusion
    • A combination of
      • A huge demand for capital,
      • Superb domestic and global conditions for liquidity,
      • Booming equity markets
      • Upcoming elections…
    • … is leading to a financial revolution in Russia.
    • One major part of this is a booming IPO market which is reshaping both…
      • Russia’s domestic equity market
      • The position of Russia’s equity market globally.
  • Conclusion
    • In 1999, in the aftermath of the financial crisis, the question was asked whether Russia needed an equity market…
    • … without the infrastructure in place to support corporate governance and deal with capital flows, portfolio investment seemed a poor price for the instability caused by an equity market
    • Now, however, it is the equity market itself that is driving improvement in…
      • Corporate governance
      • Infrastructure developments
      • An emerging middle class.
    • It hasn’t been that the creation of a market infrastructure has led to the growth in the market…
    • … but rather the growth in the market that is leading to the generation of the infrastructure.
  • Disclaimer
    • © 2004 Renaissance Capital Holdings Limited. All rights reserved.
    • This research report is being distributed in the United States by RenCap Securities, Inc., which accepts responsibility for its contents. Any US person receiving this report who wishes to effect transactions in any securities referred to herein should contact RenCap Securities, Inc., not its affiliate. The information herein has been obtained from, and any opinions herein are based upon, sources believed to be reliable, but we do not represent that it is accurate or complete and it should not be relied upon as such. All opinions, forecasts and estimates herein reflect our judgment on the date of this report and are subject to change without notice. The report is not intended to be an offer, or the solicitation of any offer, to buy or sell the securities referred to herein. From time to time RenCap Securities, Inc. or its affiliates or the principals or employees of RenCap Securities, Inc. or its affiliates may have a position in the securities referred to herein or hold options, warrants or rights with respect thereto or other securities of such issuers and may make a market or otherwise act as principal in transactions in any of these securities. Any such non-US persons may have purchased securities referred to herein for their own account in advance of release of this report. RenCap Securities, Inc. or its affiliates or the principals or employees of RenCap Securities, Inc., or its affiliates may from time to time provide investment banking or consulting services to or serve as a director of a company being reported on herein. Further information on the securities referred to herein may be obtained from RenCap Securities, Inc. upon request. Member of the NASD and SIPC. RenCap Securities, Inc. is a subsidiary of Renaissance Capital Holdings Limited and forms a part of a group of companies operating outside of the United States as "Renaissance Capital".
    • This report has been issued and approved for publication in the United Kingdom by RENAISSANCE CAPITAL LIMITED, which is regulated by FSA for the conduct of investment business in the UK. It is issued in the UK to persons who are market counterparties or intermediate customers (as detailed in the FSA Rules) and is only available to such persons. It is not available for, and should not be relied upon by, Private Customers.
    • In all other jurisdictions, this material has been issued by the RENAISSANCE CAPITAL HOLDINGS LIMITED. Foreign-currency-denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or the price of, or income derived from, the investment. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies, effectively assume currency risk. Investing in Russia and Russian securities involves a high degree of risk and investors should perform their own due diligence before investing.
    • This material is for your private information, and we are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security and is specifically not a recommendation to purchase or sell any securities. The material is based upon such information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such. We accept no liability in relation to the use of this information or any investor activity taken in the securities described herein. Opinions expressed are our current opinions as of the date appearing on this material only. We make no representation that we will update the information discussed in this material on a regular basis, or correct any inaccuracies contained herein. We and our affiliates, directors, partners, and employees, including persons involved in the preparation or issue of this material may, from time to time, have long or short positions in, and buy and sell, the securities, or derivatives (including options) thereof, of companies mentioned herein.