Russian stocks may be 'essentially worthless,' MSCI research suggests

1 month ago
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Russian stocks whitethorn person "no value" compared to the prices listed connected the Moscow Exchange, caller probe from MSCI has suggested.

Moscow ceased trading aft stocks capitulated connected the backmost of Russia's penetration of Ukraine, reopening a period later aft the exchange's longest shutdown since the autumn of the Soviet Union. The Moscow Exchange besides had its recognized presumption revoked by galore planetary powers.

The MOEX Russia Index is down much than 36% year-to-date arsenic of Friday afternoon, and planetary investors successful Russian securities person endured restrictions successful managing and valuing their positions since the warfare began.

Based connected a exemplary that links stocks and enslaved markets, MSCI connected Friday said the marketplace for credit-default swaps suggests that Russian stocks "may beryllium fundamentally worthless" successful opposition to the prices listed connected the exchange.

Credit-default swaps are derivatives that alteration investors to swap their recognition hazard connected a company, state oregon different entity with that of different investors. Lenders get CDSs from investors nether the statement that the capitalist pays the lender if the borrower defaults connected its indebtedness obligations.

"The incongruity betwixt the CDS marketplace and the listed prices of Russian stocks whitethorn beryllium owed to a operation of technical-default fear, nonaccomplishment of the CDS auction mechanism, restrictions connected trading CDS linked to the securities of sanctioned companies and a little perceived worth of Russian equity for CDS investors," MSCI Senior Associate Zoltan Sass added successful Friday's report.

The exemplary works connected the presumption that if a firm's banal terms goes to zero, it volition take to default connected its debt. In this framework, MSCI explained, a company's default hazard is driven by its worth comparative to its level of debt.

Models rooted successful this conception person been utilized to cipher default probabilities from stock prices, but they tin besides infer equity prices from default probabilities, which MSCI analysts did successful Friday's probe note.

"We find that trading successful Russian firm CDS has surged since the Russia-Ukraine warfare began. Increased trading enactment whitethorn bespeak that the CDS marketplace contains accusation not contiguous successful the equity market. Thus, our probe incorporates the CDS market's implied default probabilities to exemplary Russian equity prices," Sass said.

While Russian stocks person declined by 36% since the invasion, the prices erstwhile aligned with the CDS marketplace were fundamentally zero, MSCI information showed.

"A basal mentation for the disconnect is that investors trading connected 1 marketplace are not trading connected the other. Most foreigners are incapable to commercialized Russian stocks, and CDS are lone accessible to organization investors," Sass added.

Market distortions

The probe besides noted that the model's results could besides beryllium the effect of the CDS marketplace itself being distorted by the Russia-Ukraine war. If a default causes a payout connected a CDS, the underlying bonds would person to beryllium auctioned.

"Difficulty successful transferring these bonds owed to sanctions oregon different marketplace frictions whitethorn inflate the premium required for default extortion and hence the CDS implied default probability," Sass said.

"Furthermore, impediments successful making enslaved payments owed to sanctions could trigger a method default, wherever the steadfast is not really bankrupt but is incapable to wage coupons oregon main for different reasons."

Given that Russia's marketplace is tightly restricted, each areas of the marketplace person seen immoderate level of distortion, Sass highlighted, but MSCI believes the disconnect betwixt banal and CDS markets is "striking" and whitethorn bespeak divergent valuations owed to respective factors.

"Russian companies whitethorn proceed to operate, make gross and wage dividends, which means they whitethorn person worth to the tiny fraction of investors who tin put successful them. In contrast, Russian stocks look to beryllium worthless from the position of CDS investors," Sass said.

"This deficiency of worth whitethorn beryllium emblematic of a operation of technical-default fear, nonaccomplishment of the CDS auction mechanism, restrictions connected trading CDS linked to the securities of sanctioned companies, and a little perceived worth of Russian equity for CDS investors."

He suggested that greater consistency successful pricing could beryllium achieved done the reopening and reintegrating of Russian markets and the economy, and the lifting of sanctions, but said successful the meantime, investors whitethorn question a deeper representation of terms drivers successful stocks by looking beyond a azygous plus class.