Financial Markets and Financial Institutes 3.7. The role of the stock market in the economy modernization and innovation promotion The crisis has exposed deep problems and contradictions of the Russian economy, its lack of readiness for the challenges of globalization. By the end of 2009, the country's leadership and society in an explicit form have formulated policy of economic modernization. A key role in its implementation has to play the financial market, but is it ready for such ambitious goals 3.7.1. Yield of financial and non-financial investments In the long-term, the growth of capital markets follows the dynamics of basic indicators, such as net earnings of companies and gross domestic product. For example, our estimates of the growth in the dynamics of the stock markets and leading economic indicators in 12 developed capital markets over the past 50 years demonstrate that the average growth of stock indices tend to match the average growth rate of nominal GDP1. In emerging markets, equity markets as a rule, tend to grow somewhat faster than nominal GDP growth due to attracting investments from abroad.
Fig. 44 shows the ratio of the rate of growth of the RTS index, GDP and profits of the Russian companies. They show that on the eve of both the Russian crises, the growth rate of stock indices were sharply away from GDP growth. Then, as the market recovered, the stock indices were trying to catch up with production and profit indicators.
GDP, nominal GDP, real Stock market (RTS index) 2000 Net profit, national economy Crisis 1997/Crisis 2008/1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 -Source: RTS and Russian Statistical Service.
Fig. 44. The growth of the stock market compared with the growth fundamental indicators The most vulnerable point of the Russian stock market is that earnings on investments are substantially higher than the profitability of productive assets - fixed assets and current assets.
Section 1.3. Report of National Securities Market Participants. The Russian stock market and creation of an international financial center. Ideal model of the Russian stock market over the long term (until 2020). Moscow, 2008. Published on the website www.naufor.ru.
1995 = 100% RUSSIAN ECONOMY IN trends and outlooks As a result, instead of attracting investments to create new production capacity, the stock market from time to time starts to play the role of "pump", sucking resources from the real economy. High yield of investments in such market is ensured mainly by the resources of the new-coming investors to a lesser degree of profit growth issuers. Meanwhile, emphasizing the link between investment and economic growth, Paul Samuelson, Nobel laureate in economics, noted that "investments will only occur when a real capital is available"1 In other words, the generator of economic growth is the real capital, but Russia contributes very little in the accumulation of the Russian stock market.
Fig.45 shows the profitability of investing in the stocks of the portfolio as the RTS index and the profitability of productive capital that can be used as a criterion for making investment decisions on the effectiveness of investments in the growth of productive capacity.
Source: RTS and Russian Statistical Service.
Fig. 45. Profitability of investments in shares and return on assets in the economy In 1996-2010. in only three years out of 15 years (1998, 2000 and 2008-m), the return on investment in shares is substantially lower than the return on fixed assets. And, despite the fact that the linear trends of profitability of investments in the RTS index and manufacturing assets converge, the gap between these rates is still significant, which creates a substantial risk of outflow of domestic capital in the real economy in the short-term investments in the financial market.
3.7.2. Contribution of the corporate bond market in real capital growth A surprising phenomenon of 2000. was the rapid development of the ruble bond market (Fig. 46). Capitalization of the ruble bond market grew from 0.6 trillion rubles in 2000 to 5.trillion rubles in 2010, or nearly 10.0 times. Corporate bonds market was the fasters in growth Samuelson, Paul E., William D. Nordhouse, Economics: translation from English: 16 ed.: Publishing house "Williams", 2005. - P. 389.
Financial Markets and Financial Institutes among all ruble bonds. Their combined market capitalization has grown from 46 billion rubles in 2000 to 3.0 trillion rubles in 2010, or 65.2 times.
6 000 Government bonds 3 Corporate bonds 2 5 Regional bonds 1 Federal loan bonds, savings bonds, etc.
Fig. 46. Volume of ruble-denominated bonds in circulation The rapid growth of the corporate bond market relies heavily on various external and internal of growth mechanisms. Underlying growth in the corporate bond market since the beginning of 2004 to July 2008 lay strategy «carry trading», carried out by Russian banks and foreign hedge funds. From August 2008 to the present growth of the ruble bond market is based on monetary liquidity is concentrated in banks, first by providing them with support for anti-crisis state, then with a significant mitigation of monetary policy. One of the factors of growth of the corporate bond market in 2009-2010 was also slow recovery of the loan portfolio, which allowed the last shift of resources from the loan market in bonds. Catalyst for the growth of the ruble bond market since the mid 2000's was playing the market repo with the Bank of Russia and interbanking repo, through which banks could borrow short-term resources for long-term investments in bonds.
One of the prerequisites for corporate bonds in most cases was a guarantee of emitters in the form of an offer, granting the owners of bonds the right to present them for redemption by the issuer within one to three years from the date of placement. Similar offers essentially changed the nature of long-term bonds, turning them into instruments of relatively short-term financial resources. Resources attracted by issuing bonds that are actively used by issuers to implement the financing of mergers and acquisitions, credit refinancing, active business expansion and other relatively short-term objectives. Because of the short-term bond financing and low profitability of investments in new fixed assets and other productive assets, the role of bonds in the financing of real capital has been and still remains minimal.
Table 7 demonstrates the parameters of the ruble corporate bond market in 2000-2010, recalculated in dollar terms. Despite the rapid growth in placements of corporate bonds from 1.1 billion dollars in 2000 to 28.2 billion dollars in 2010, the volume of resources addressed bln Rb RUSSIAN ECONOMY IN trends and outlooks to basic capital formation was very low. For example, if the total placements of bonds in amounted to 28.2 billion dollars, only 0.03 billion dollars of this sum, or 0.1% of the placed bonds was addressed to the purchase of fixed assets. Overall, in the 2000-s the share of the volume of corporate bond addressed to fixed assets, ranged from 0.00% to 6.7%.
Table Structure of the ruble corporate bonds market (USD billion) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Capitalization 1,6 2,5 3,3 4,8 8,9 17 33,2 49,2 67 79,7 98,Secondary mar- 0,2 1,1 2,3 8,2 14,7 44,2 134,9 371,1 457,4 293 756,ket, including repurchase Allocation 1,1 0,8 1,5 2,6 4,9 9,2 17,1 17,9 16,1 29,0 28,Fixed capital 0 0 0,1 0,1 0,1 0,3 0,1 0,2 0,2 0,1 0,Same, as% of 3,0 2,1 1,1 1,8 0,3 0,4 0,3 0,1 0,capitalization Same, in% by 6,7 3,8 2,0 3,3 0,6 1,1 1,2 0,3 0,volume placement Source: estimates based on the MICEX, cBonds, the Bank of Russia and the Federal State Statistics Service.
3.7.3. Effect of IPO shares on the economy More effective tool for raising funds to finance capital assets than the issue of corporate bonds, are public offerings in the form of an IPO and SPO. This is due to the fact that the proceeds from the IPO are more long-term. Table 8 shows the parameters of the market shares of Russian companies. They show that the most active IPO shares were held in 2006 and 2007, when companies raised 17.0 billion dollars and 33.0 billion dollars respectively. From the amount of proceeds from IPO-SPO in 2006, 18.8 % was addressed by the companies for acquisition of fixed assets, and in 2007, this indicator fell down to 10.9%. In some years, for example, in 2008, 110.5% was allocated in the fixed assets, and in 2009 - 117.6% of the volume of IPO. This is due to the fact that some investments in fixed assets the companies received through a private placement of shares, rather than through IPO-SPO. In 2010, Russian companies, including those registered offshore RUSAL and Mail.ru, attracted 6.3 billion dollars with IPO-SPO, whereas in total through the issuance of shares, 2.6 billion dollars were invested in fixed assets, or 46. 0% of the volume of IPO-SPO. A significant portion of the resources involved in the stock market has been addressed to purchase the business from their former owners, refinancing of debt service and mergers-acquisitions, including acquisition of major shareholdings. Meanwhile, volumes of IPO and investments in real capital by issuing shares are much smaller than mergers and acquisitions1. From 2000 to 2010 the total amount of IPO-SPO of the Russian companies amounted to 70.7 billion dollars, while the volume of mergers, acquisitions made 564.3 billion dollars, which is 8 times more.
For example, here is the comment of Prime Minister Vladimir Putin at a meeting on the problems of energy on Feb. 24, 201:, the use of utilities (JAG and TGK), assets from the additional emission amounting to 450 billion rubles. Of the total amount it is invested about 270 billion rubles, nearly 100 billion rubles are still kept at the accounts, and 66 billion rubles "are addressed at the ongoing activities, the purchase of non-core assets and simply "consume" or, frankly, were aimed at speculative purposes". Malkov I., A. Peretolchina. “Investors are accelerated”. Vedomosti, February 25, 2010, p. 1.
Financial Markets and Financial Institutes Therefore, it is early to say that the major part of proceeds from the IPO, and from corporate bonds are contributing to the modernization of economy and sustained economic growth1.
The amount of funds that companies are attracting by placement of shares and corporate bonds, and then address at the purchase of fixed assets, make only a tiny portion of fixed assets financing.
Table Structure of the Russian companies’ corporate bonds market (USD billion) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Capitalization 40,7 74,6 105,5 176,3 230,0 548,6 1057,2 1503,0 397,0 861,4 938,Secondary 46,7 49,4 86,8 188,3 541,3 374,0 914,2 1687,1 1982,5 1155,7 1430,market, including foreign exchange IPO 0,5 0,2 1,3 0,6 3,0 5,2 17,0 33,0 1,9 1,7 6,Fixed capital 0,2 0,1 0,2 0,2 0,1 3,2 3,2 3,6 2,1 2 2,Same, as% of 0,5 0,1 0,2 0,1 0,0 0,6 0,3 0,2 0,5 0,2 0,capitalization Same, in % to 40,0 50,0 15,4 33,3 3,3 61,5 18,8 10,9 110,5* 117,6* 46,IPO volume The volume of 5,0 12,4 17,9 32,3 27,0 60,4 61,9 125,9 110,4 56,1 55,0** mergers, acquisitions * - value greater than 100% because some share of investments in fixed capital could be made through private placements;
** estimated by www.mergers.ru.
Source: estimates based on the MICEX, the Bank of Russia, the Federal State Statistics Service, www.mergers.ru The main sources of fixed assets financing remain the property accumulated by the company, budget assets, extra-budgetary funds and bank loans. Their share in 2010 accounted for 69.6% of all sources of investments in fixed assets. The share of bank loans in the sources of fixed assets financing in 2009-2010 was steadily declining, from 11.8% in 2008 to 10.3% in 2009 and to 8.7% in 2010. This suggests that, despite the increased liquidity, the banking system has not yet recovered from the point of credits in the economy.
During the 2000-s. the share of funds attracted by bonds and shares issues in the funding sources of capital ranged from 0.1% in 2001 to 3.4% in 2005. In 2009 and 2010 this indicator amounted to 1.1% and 1.4%.
For some reason the rule «q-Tobin» works badly in Russia, according to which in case of high coefficient characterizing the ratio of market capitalization to recovery price of business, then it becomes more profitable to invest in the real capital. (Mishkin F.. Economic Theory of Money, Banking and Financial Markets. 7th edition:
Translation from English. – Мoscow.: JSC «I..D. Williams», 2006, p. 738. It is interesting that from other developing countries, according to the IMF Report on Global Financial Stability, we differ by lower coefficient P/BV (ie, ratio company’s capitalization to its balance value), which does not promote investment in real capital.
Russia’s problem is dual: first, shares’ price is overvalued, second, great value of inefficient assets.
RUSSIAN ECONOMY IN trends and outlooks 3.7.4. Private equity and venture capital funds Problem of the Russian economy from the perspective of modernization is the weakness of the industry of private equity funds and venture capital funds. These categories of funds, working with Russian companies can be divided into funds established offshore abroad (Svarog Capital Advisors, Russia Partners, Delta Private Equity Partners, Baring Vostok Capital, etc.) and closed investment funds, carrying out activities on the basis of Federal Law "On Investment Funds". As of mid-2009, according to the magazine "Finance", the value of the first group of funds was about USD 3 billion1, and the second one, according to the National League managers - about RUR 75 billion2.
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