In the third quarter, Russian private investors were actively replacing bonds of highly reliable issuers with securities of companies with increased credit risk. This led to a noticeable decline in the quality of the investment portfolio. This pursuit of excess returns could lead to heavy losses in the event of further deterioration in the market environment and an increase in the number of defaults in the market.
Change of preferences
According to the Bank of Russia, in the third quarter, the total number of brokers ‘clients reached 17.1 million, and the total value of individuals’ assets in brokerage accounts amounted to 7.7 trillion rubles. At the same time, clients have adjusted their preferences in the stock market. The Central Bank, in particular, notes the recovery in demand for shares of foreign companies. If, according to the results of the second quarter, net investments in them amounted to 62 billion rubles, then in the third quarter they doubled and reached 138 billion rubles. At the same time, the net inflow of funds into the shares of Russian companies decreased from 117 billion rubles. up to RUB 76 billion
Fundamental changes are noted in more conservative securities – bonds.
If in the previous three quarters the greatest demand was for the bonds of credit institutions, then at the end of the third quarter the maximum inflow of funds was noted in other corporate securities. For the quarter, private investors invested almost 72 billion rubles in such securities, which is more than twice the result of the previous quarter. At the same time, net purchases of bank bonds decreased from RUB 128 billion. up to RUB 23 billion, the minimum since the first quarter of 2019. At the same time, private investors were actively getting rid of government bonds – sales reached 15 billion rubles, the maximum value since the second quarter of 2020.
Corporate interest
The Central Bank associates such tendencies with the search for increased profitability by individuals, in particular, high interest is noted in bonds with an increased credit risk from issuers from the construction and other industries. According to Reuters, since the beginning of the year, OFZ yields have grown by an average of 3.2 percentage points to 8.5–8.8% per annum. This is less than the increase in inflation over the same period (3.49 percentage points, up to 8.4%). A more significant increase in profitability is noted in the corporate segment. According to the estimates of the chief analyst of the debt markets BC Region Alexander Yermak, since the beginning of the year, the yield on corporate bonds has grown by an average of 3.9 percentage points. At the same time, the change in yield across all industries amounted to 3.35–5.2 percentage points.
Among the bonds of the second echelon, as noted by Alexander Ermak, the highest average yield is shown by companies in the construction sector (10.7% per annum, an increase of 4.9 p.p.), the leasing industry (10.5% per annum, +4 p.p.). ) and the timber industry (10.4% per annum, +4 p.p.). Bonds of the third echelon since the beginning of the year have shown an increase from 6.5-8.8% per annum to 10.4-12.15% per annum. The average yield on high-yield bonds (HDB) rose, according to his estimates, from 11.1% to 14.9% per annum. “Private investors found an outlet in the market for high-yield ruble bonds and structured notes in foreign currency, abandoning OFZs, Eurobonds, and deposits, and began to participate in these instruments very actively,” notes the Deputy Director General for Active Operations at Veles Capital »Evgeny Shilenkov.
Conservative risk
The active purchase of second and third tier bonds led to a deterioration in the credit quality of classic bond portfolios. According to the Central Bank’s estimates, the share of non-investment grade bonds exceeded half. This, according to market participants, is fraught with negative consequences for individuals, especially against the background of the tightening of the rhetoric of global regulators and the increased risks of defaults in the world. According to Evgeny Shilenkov, now it is necessary to more carefully form and diversify the portfolio.
“For companies that attract financing at double-digit rates, refinancing will be even more expensive in the future, and for some, it may even stop, this could lead to restructuring and default,” he notes.
The NRA notes that as the monetary policy of the Central Bank tightens, the risks will increase. According to the managing director of the rating service of the agency, Sergei Grishunin, the majority of defaults in Russia are caused by the realization of non-financial risks, in particular the risks of corporate governance and inefficiency of business models. To reduce the risk of default, Mr. Grishunin recommends paying attention to the profitability of operating cash flow, the efficiency of working capital management, as well as cash flow coverage of payments on borrowed funds.
Another important risk to consider when buying bonds with a low credit rating is liquidity risk.
It characterizes the ability to quickly sell an asset at a price close to the market price. “Liquidity directly depends on the credit quality of the issuer,” says Anton Kostin, director of the fixed income asset management department of Sistema Capital. In such investments, managers are advised to adhere to the diversification rule. “The less the portfolio is diversified, the higher its credit quality should be,” notes Dmitry Kosmodemyansky, asset manager of Otkritie Management Company.
With an eye on the Central Bank
In the coming months, the Central Bank’s policy will continue to have a significant impact on bond prices. According to the consensus forecast of analysts, further growth of the key rate remains within 1-1.5 pp prices. “Bond markets are now preparing to jump on the first command from the Central Bank. If you buy long bonds, you need to be prepared for a negative revaluation on a certain horizon, but at the moment the market for ruble bonds, especially long OFZ bonds, looks extremely attractive, ”notes Mr. Kosmodemyansky.
If stable signals of easing inflationary pressure appear, the negative trend in the quotes of ruble bonds will be replaced by growth. “As part of this, investors with long-term portfolios will get the maximum return,” notes Anton Kostin. This is possibly related to the lengthening of the maturity of the portfolios of private investors. According to the Central Bank, the weighted average term to the next offer or maturity increased from 2.5 to 2.8 years.
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