Are there any promising projects for green investing in Russia? What are the possible consequences of the COVID-19 epidemic for the global and the Russian financial markets? How should we behave during the crisis caused by the epidemics and the oil price drop? Invest Foresight has discussed these questions with Edgars Kuplais, Global Sales Trader at Saxo Bank.
– What specific features do “green investments” have from the financial perspective? Do you see any promising projects for green investing in Russia?
In recent years, “green investments” have become one of the fastest-growing areas in the financial markets. This was driven by relatively high prices for fossil fuels, which made investments in the alternative power generation more attractive, as well as by strong demand from investors who have become more conscious in terms of selecting assets for investments. The criterion of whether a company’s business is “ethical” has widely become a key decision-making factor for investments in an issuer’s shares or bonds.
This resulted in the formation of a large market of “ethical” funds, and so-called “green bonds” have also gained momentum. The latter were issued for the express purpose of financing projects that helped to reduce environmental footprint of production facilities or to create new projects. Due to being in demand and having a specific usage, the issues of such bonds often had lower yield. Among Russian companies, we can mention the Russian Railways, who issued Swiss franc-denominated “green bonds” for a total of 250 mio francs in early March.
It is still uneasy to say whether this kind of financing has a big future in Russia. The purpose of a limited number of such placements effected by Russian issuers was, primarily, to borrow funds from Western investors at more attractive rates. In the future, as people’s wealth grows, the demand for such instruments in the domestic market will also increase.
An important limiting factor in the near future will be the drop in oil prices and the global economic crisis. This will, on the one hand, cut the profitability of alternative power generation, and on the other hand, reduce the number of investors who have idle funds to buy “green” securities.
– What are, in your view, the most important possible consequences of the COVID-19 epidemic for the global and the Russian financial markets?
The impact of the COVID-19 epidemic on financial markets is yet to be assessed since it has been a little more than a month since the stock market indices collapsed and there is a lot of uncertainty as to when this crisis will be over.
In fact, despite the reaction of financial markets, we still have too little evidence to determine how deep will the crisis be in Russia, Europe, and the United States; the reason is that macro statistics is issued with a time lag.
The Chinese example shows that the adverse impact on the economics may be much stronger than expected. Thus, the Chinese producer price index in February reached its lowest value since the start of calculations in 2004. Unemployment benefit requests data for Europe and the USA provides some help in evaluating the scale of the economic crisis. For example, preliminary data shows that in Norway, the unemployment level rose to 10%, which is the maximum since 1930s. In the USA, the number of new jobless claims filed has grown by more than 3 mio.
Now it is already clear that whole industries will be unable to survive without governmental support. Those are, among others, air carriers, travel agencies, operators of hotel chains, shopping malls and cinema theatres. Car and real estate purchases have also experienced a dramatic fall. This list could go on and on. The burden will partially be laid on commercial banks, who will have to provide loan deferments for both individual clients and companies.
Governments and Central Banks are already implementing measures to reduce the impact of the epidemic on the real sector, such as providing benefits to those who lose their jobs, easing capital adequacy requirements for banks and injecting excess liquidity into financial markets.
One of the important indicators of the financial markets regaining their optimism will be the stabilization in China, Korea, and Japan, the countries that were first to be affected and to feel the impact of the economic crisis. If they manage to avoid the second wave of the virus spreading and start to show signals of economic recovery, this will inspire optimism in the European and American markets. In this event, we will have an idea of when the crisis will be over, and the uncertainty factor, which is negatively affecting the investor sentiment, will be reduced.
In this situation, the Russian stock markets will correlate with the sentiment on global platforms. In addition to that, the situation will depend on the dynamics of oil prices, that show no trend towards recovery. On the other hand, the positive effect of the global crisis should be the fact that it will force the OPEC countries to start negotiations in order to reach an agreement on the oil production quotas. Sanction rhetoric will also diminish against the background of more important issues.
– Do you think the global financial markets and investment institutions will maintain their activity on the peak of quarantine measures taken by different countries?
In mid-March, as the volatility in the financial markets was high, a number of European and US politicians and financial experts called for a temporary suspension of stock trading. Despite the restrictive measures being implemented by a number of exchange institutions in the worst-hit regions, the most notable one this far is the ban on opening short positions in certain stocks.
In our opinion, the risks of the temporary closure of stock exchange and other institutions are very low, as in fact they enable the functioning of the financial system and are necessary for the implementation by regulators of measures stimulating economic recovery.
– Are there any dangerous “bubbles” remaining in the financial markets?
As early as in the Q4 2019 and early 2020, many analysts pointed out that the stock markets were “overheated” due to the record-setting growth driven by the past year’s results. Another source of anxiety was the fact that there had been no serious correction in 10 years passed since the previous global financial crisis. However, we can not define the present market situation as a “bubble”, as the price growth was driven by the improved financial performance of companies and a large volume of liquidity in the system, as well as by investors’ readiness to invest funds at higher multipliers.
The surprise of the March index drop was rather the sharpness than the absolute value of the correction. For example, S&P500 fell down to 35-25% of its high reached in the beginning of the year, but even with the lowest values we are back to December 2018–Fall 2017 level. A number of large companies, especially those of the high-tech sector, had practically no sensible changes in their capitalization. The worst-hit sectors were those directly dependent on people’s mobility and tourism. Power generating sector was also affected suffering from a combination of factors: sharp drop in demand and the inability to reach an agreement concerning the prolongation of raw material production quotas.
– Which advice would you give to an investor: how should one behave during the crisis caused by the epidemics and the oil price drop?
If the investors’ planning horizon exceeds 10 years, and they have enough funds to pay their everyday bills, in this situation one should not be worried about a short- or medium-term drop in the portfolio value and the reduction of dividend and coupon yield. The specific feature of the current crisis is that even though it will have the large-scale consequences for the global economy (at least for the first six months of the year), returning of the sanitary situation back to normal will enable a rather quick consumption recovery driven by economy stimulating measures, among others.
One of the risks that may follow is the growing inflation, therefore, it is worth to gradually reduce investments into fixed income instruments and increase the allocation into equity. One should stay away from companies with a large debt burden and those whose business may suffer from the prolongation of measures aimed at restricting people’s mobility.
It should be kept in mind that the market recovery in the long run is not guaranteed. We can recall that despite a nearly threefold growth of the Nikkei 225 index comprising the largest Japanese companies since 2011, its maximum value still remained 35% lower compared to its 1989 high.
Unfortunately, the situation for Russian investors is a bit more complicated due to the country’s economy being largely dependent on raw material prices. If oil prices do not recover in the coming months, there is a risk of continued ruble devaluation. In this situation, it is reasonable to diversify the portfolio and increase the share of savings in foreign currency.
On the other hand, as was demonstrated by the past crises, if your expenses are fully denominated in rubles, then over time, the yield from rising stock prices and dividends will compensate for the devaluation.