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. Last Updated: 07/27/2016

Investors Making Shift to Shares

Russian investors are beginning to switch funds from the government securities market, where yields are falling, to the share market, analysts said Thursday.

The much smaller equities market, rising on good political and economic news, now offers investors better returns than government securities, although Russian T-bills are seen as some of the world's most lucrative fixed income paper, they said.

If you buy Russian shares today and hold them until the end of the year, they would reap between 48 to 80 percent annual, said Yury Agaronik, an analyst from IK Propect.

Yields on T-bills are now at record lows below 50 percent.

"In theory a fall in the yields and a price rise on the share market should lead to an outflow of funds from the first market to the second," said Andrei Yashchenko, fixed income analyst at United City Bank.

But Yashchenko, who sees a further medium-term fall in T-bill yields and long-term rise in shares, said the relative return picture in Russia was more complicated than that.

The first reason, was the small size of the Russian share market, with average daily trading volumes 70 to 80 times lower than that on the government paper market, he said.

On Wednesday the Russian Trading System set a record high volume of $46.97 million -- just over 250 billion rubles. Average daily trading volume on the government securities market is 3 trillion to 4 trillion rubles.

"Even if a small part of the money from the government securities market flowed to the share market, it would cause a big price rise due to the low capitalization of the market," Yashchenko said.

That could be a barrier to any major switch in investment.

The second reason was the poor legal framework for the share market as compared to the government securities, he said. "The fact that a shareholder with a big stake may not be allowed into the [premises of the] company prevents prices from rising too quickly and increases risks," he said.

But Agaronik said risks on the share market were falling, as investors had already found Russian brokers they can trust. He also said Russian banks are now offering good sub-depositary and custodian services for foreign investors. Sergei Kosynkin, corporate securities director at Bank Menatep, said Wednesday that Russian banks were switching from the government securities market where yields are falling. "New money appeared from those operators who pop up in the market when the treasury bill yields fall," he said.

Russian shares have risen strongly in the last few days after Russia's better-than-expected credit rating and news President Boris Yeltsin had moved from a hospital where he was preparing for his heart operation to a sanatorium.

Within the last three days the rise in Mosenergo has worked out at an annualized return of 1,899 percent. With Rostelekom the figure is 1,062 percent and with LUKoil 1,362 percent, Agaronik said. He forecast a further rise of prices with occasional corrections until the end of the year.

At the same time the authorities have got T-bill yields back on to a downward track. At Wednesday's auction of six-month GKO discount Treasury bills the annualized average yield fell to an all-time low of 49.63 percent and a top Central Bank official said the yields would fall further as foreign investment built up.

The Finance Ministry has cut the effective dollar yield for non-residents to 16 percent annual from 19 percent from Oct. 16, prompting an increased inflow of foreign investment.

The profile of investors in the two markets is different, analysts noted. Foreigners are major investors in the share market, while the government securities market is mainly occupied by Russian banks, Yashchenko said.

At the same time it is foreign funds which prefer to invest in shares, while foreign banks go for government paper, said Peter Kisler, a fixed income analyst from Rinaco-Plus.