Global Liquidity Crisis: Implications For Russia

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Global Liquidity Crisis Implications For Russia
IV IPO Congress April 4, 2008 Alexander
Morozov Chief Economist for Russia and CIS
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Two Key Questions

• When will the liquidity crisis be over?
• What are the implications for Russias economy
  and equities?

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When Will The Liquidity Crisis Be Over?

• Short answer nobody knows
• Sophisticated answer when the risk aversion
  abates
• So, what worries investors?
• US economy entering into a recession
• Uncertainty regarding its consequences for global
  economic growth (does the EM decoupling story
  hold?) and commodities
• Still unclear implications of exposure to the US
  mortgage market for US and non-US financial
  institutions

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How Do Markets Respond?

• Rise in market volatility (e.g. VIX) and,
  therefore, risks
• Increase in cash in investment portfolios to
  overweight
• Flight to quality (UST)
• Widening credit spreads
• No access to bond market for sub-investment grade
• Unwind of carry-trade funded in JPY, CHF

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Some Guidance - Macro

• Risks of US recession continue rising back to
  stable growth likely only in 2009
• Eurozone, UK, and Japanese growth decelerates as
  well
• Decoupling story of EM will be tested China,
  India, Russia have better chances to pass the
  test
• Fed, ECB, BOE and BOJ rates are to decline during
  next 12-15 months
• Slower growth restrains inflation, yet does not
  reverse its acceleration trend (food, energy,
  commodity prices), rate cuts in OECD may fuel
  inflation

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Some Guidance - Technical

• Increased volatility is not high
• Credit spreads keep rising in line with
  volatility
• Carry trades can unwind further
• Lower world growth ? higher credit risks ? higher
  credit spreads ? bad for risky sub-investment
  grade issuers
• Lower global rates and higher global inflation ?
  good for equities

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Implications For Russias Economy

• Russia appears shielded better than many others
  from the global financial storm
• due to its exceptionally strong macroeconomic
  fundamentals
• limited negative impact on economic growth is
  likely amidst slower credit growth
• yet, a risk rises that oil prices fall
  significantly with the global economic slowdown

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Implications For Russias Equities

• Macroeconomic fundamentals are equity supportive
• so do relative valuations (e.g. P/E, recent
  relative underperformance)
• Russia considered 1 EM equity market for 2008 by
  institutional investors
• External environment favours equities, but not
  necessarily in GEM (USA may offer a better deal)
• Local liquidity tightening bad for bonds and
  equities
• Increased interest in IPOs as a alternative
  funding source (supply)
• Demand for equities (IPO) is still there, but
  only for good names

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Disclosure

• This presentation was prepared by HSBC (RR)
  exclusively for internal use of HSBC (RR)
  clients, in order to indicate, on a preliminary
  basis, the feasibility of a possible transaction
  or transactions. This presentation is incomplete
  without reference to, and should be viewed solely
  in conjunction with, the oral briefing provided
  by HSBC (RR). The presentation is proprietary to
  HSBC (RR) and may not be disclosed to any third
  party or used for any other purpose without the
  prior written consent of HSBC (RR). The
  information in this presentation reflects
  prevailing conditions and our views as of this
  date, which are accordingly subject to change.