Russian stocks may be ‘essentially worthless’, MSCI research suggests

New research from MSCI suggests that Russian stocks may be “worthless” compared to their Moscow exchange-listed prices.

Moscow halts trading after Russia’s invasion of Ukraine causes stocks to capitulate, reopen after a month After the longest shutdown of exchanges since the collapse of the Soviet Union. The recognition status of Moscow Exchange has also been revoked by many international powers.

This MOEX Russia Index The stock was down more than 36% so far this year as of Friday afternoon, and international investors in Russian securities have been limited in managing and evaluating their positions since the war began.

Based on models linking the stock and bond markets, MSCI said on Friday that the credit default swap market indicated that Russian stocks “may be essentially worthless” compared to exchange-listed prices.

A credit default swap is a derivative that enables investors to exchange their credit risk against a company, country or other entity for the credit risk of other investors. Lenders receive CDS from investors under an agreement, and if the borrower defaults, the investor pays the lender.

“The inconsistency between the CDS market and the listed prices of Russian stocks may be due to concerns about technical defaults, the failure of the CDS auction mechanism, restrictions on CDS transactions related to securities of sanctioned companies, and lower perceived value. Russian stocks,” MSCI senior associate Zoltan Sass added in Friday’s report.

The model’s working assumption is that if a company’s share price falls to zero, it will choose to default on its debt. In this framework, a company’s default risk is driven by its value relative to its debt level, MSCI explained.

Models rooted in this concept have been used to calculate default probabilities from stock prices, but they can also extrapolate stock prices from default probabilities, as MSCI analysts did in a Friday research note.

“We found that since the beginning of the Russian-Ukrainian war, there has been a surge in the trading volume of Russian corporate CDS. The increase in trading activity may indicate that the CDS market contains information that does not exist in the stock market. Therefore, our study incorporates the implied probability of default in the CDS market Model Russian stock prices,” Sass said.

While Russian stocks are down 36% since the invasion, they are at essentially zero when in line with the CDS market, MSCI data shows.

“A fundamental explanation for this disconnect is that investors who trade in one market are not in another. Most foreigners cannot trade Russian stocks, and CDSs are only available to institutional investors,” Sass added.

market distortion

The study also noted that the results of the model could also be the result of the CDS market itself being distorted by the Russian-Ukrainian war. If the default results in a CDS payment, the underlying bond must be auctioned.

“The difficulty of shifting these bonds due to sanctions or other market frictions may inflate the premium required for default protection, so CDSs imply a probability of default,” Sass said.

“Furthermore, impeding bond payments due to sanctions could trigger a technical default, where a company is not effectively bankrupt but cannot pay coupon or principal for other reasons.”

Given that the Russian market is heavily restricted, there is a degree of distortion in all areas of the market, Sass stressed, but MSCI sees the disconnect between the equities and CDS markets as “stunning” and likely reflects valuations due to a number of factors. value difference.

“Russian companies may continue to operate, generate income and pay dividends, which means they may be valuable to a small group of investors who can invest. By contrast, from a CDS investor’s perspective, Russian stocks appear to be worthless value,” Sass said.

“This lack of value may be a symptom of fears of technical default, the failure of the CDS auction mechanism, restrictions on CDS trading related to securities of sanctioned companies, and the lower perceived value of Russian stocks by CDS investors.”

He suggested that greater consistency in pricing could be achieved through the reopening and reintegration of the Russian market and economy and the lifting of sanctions, but said at the same time that investors may seek a deeper understanding of the drivers of equity prices by looking beyond a single asset class .