Russian stock market forecast for 2024

In the past year, the Russian stock market was able to win back most of the losses of 2022. At the end of 2023, the Moscow Exchange index added more than 44%. In the coming year, market participants expect growth of 10–20%. The key risks are the Central Bank’s tough monetary policy, the global economic recession and falling oil prices, as well as the further expansion of sanctions. Private investors will remain the main driving force, provided that the Central Bank moves from tight to looser monetary policy.

Modest prospects

In 2024, portfolio managers and analysts expect further growth in the Russian market, but doubt that it will be possible to repeat the success of 2023. In the base scenario, experts expect an increase in the Moscow Exchange index by 10–20%, to 3400–3720 points. At the same time, intra-annual fluctuations of the index are not excluded in the range of 2900–4000 points. “The growth potential of the Moscow Exchange Total Return Index in 2024 will be about 30%, with 20% coming from share price growth and about 10% from dividend yield,” estimates Anton Kravchenko, head of the share management department at Pervaya Management Company.

More modest expectations for the market outlook than last year reflect a higher base. In addition to this, the current level of the key rate is more than twice as high as a year ago. Investment Director of Era Investment Management Company Ivan Lavrinenko draws attention to the negative impact of high rates: firstly, the population prefers short-term high rates to long-term investments in shares; Secondly, stock valuation models took into account long-term rates that increased by about 2%, which led to a slight decrease in target prices.

Market participants see the risks of keeping rates high for a long time, as representatives of the Central Bank have repeatedly stated.

Against the backdrop of tougher statements by the regulator, accelerating inflation and increasing budget spending, according to Mikhail Nesterov, head of the analytical department of TKB Investment Partners, expectations of a slower reduction in the key rate may increase. As a result, investors will give preference to bonds and deposits. With this development of events, the index, in his opinion, could drop to 2900–3000 points.

If the Central Bank switches to a looser monetary policy, which market participants expect in the second half of the year, interest in shares will increase. In such a scenario, according to Vasily Karpunin, head of the information and analytical content department at BCS World of Investments, the index could immediately reach the level of 4000 points.

Dividend calculation

However, even at the current level of rates, the Russian market retains its fundamental attractiveness. “According to the price-earnings multiplier, the market is trading at 4.7, with an average value of 5.7 over the last ten years, which indicates that it is undervalued,” notes Anton Kravchenko. In addition, Russian companies will most likely continue to pay high dividends. According to Mr. Karpunin, the average dividend yield over a 12-month horizon for securities of the Moscow Exchange index may be 10–11%. “This dividend yield is lower than money market rates, but it should be considered as an addition to the long-term investment attractiveness of shares as protection against inflationary processes,” notes Ivan Lavrinenko.

The dividend factor has a pronounced seasonality. The main season for annual payments occurs in the spring and early summer, when the boards of directors (BoD) of companies make decisions on the amount of payments; the season for interim payments opens at the beginning of autumn, the volume of which is traditionally lower. Depending on whether the recommendations of the Board of Directors coincide with market expectations or not, one can expect either accelerated growth, as in March 2023, when Sberbank and LUKOIL announced payments, or a fall, as in May 2022, after the recommendation of the Board of Directors of Gazprom did not pay dividends.

Return of the metallurgists

As in 2023, the bulk of dividend payments will come from oil industry companies. In this industry, according to Vasily Karpunin, the dividend yield will be higher than 12% for ordinary shares of Tatneft and LUKOIL, as well as for preferred shares of Transneft. He expects above 10% for Sberbank shares.

Managers do not expect large payments from non-ferrous metallurgy companies, but they are looking with hope at ferrous metallurgy companies, which have not paid since 2022, although previously they were one of the main payers of dividends.

“Perhaps Severstal or NLMK could be the first. A return to payments will definitely become a positive driver and will lead to their strong revaluation, as investors will understand that there will be dividends in the future, so they can safely include them in fair valuations of shares,” says Mr. Karpunin. Mikhail Nesterov expects payments from a number of quasi-Russian companies that will complete the redomiciliation procedure (TCS Group, HHR, Cian, X5, Globaltrans). For some companies, the profitability can be 15–20%.

Logistics turns

Despite the isolation of the Russian market, the state of the global economy will be important for it. According to a December survey of international fund portfolio managers conducted by Bank of America analysts, 32% of respondents named the risk of a global economic recession as key on the horizon in 2024. This is due not only to the high rates of the world’s key central banks (the Federal Reserve and the ECB), but also to increased logistics risks. Due to the increasing frequency of Houthi attacks on ships in the Red Sea, many global companies have redirected trade flows around Africa.

Such problems, according to Natalya Malykh, head of the equity analysis department at Finam, can lead to increased production costs and a slowdown in global economic growth, which will ultimately affect the demand for commodities. “The Suez Canal saves about seven to ten days of travel and plays an important role in the transportation of oil and other resources,” recalls Natalya Malykh.

Sanctions factor

An additional risk is posed by a possible tightening of sanctions and increased control over the implementation of restrictive measures already taken. This may lead to an increase in transportation costs, the search for new supply schemes and, as a result, reduce corporate income. Partially lost income will be compensated by a weaker ruble exchange rate, which will inevitably happen with a decrease in the influx of foreign currency into the country.

If sanctions are tightened, sectors oriented toward domestic demand—the electric power industry and federal retail—will be less vulnerable.

“In 2022–2023, the government not only did not freeze tariffs, but also significantly indexed them. Social spending in the budget remains at a high level, which will support the population’s spending on everyday goods,” notes Natalya Malykh. According to Anton Kravchenko, the information technology sector looks attractive; the main positive factor is the growth of online advertising. Until 2022, foreign players occupied a significant share of the advertising market. With their departure from Russia, market shares were redistributed in favor of Yandex and VK. Software development companies such as Astra Group are also benefiting from the current situation.

Return of issuers

The redomiciliation of quasi-Russian companies and the continuation of the IPO boom will be important for the Russian stock market in 2024. Redomiciliation is the re-registration of a company in other jurisdictions. Historically, many Russian companies have registered their head offices in jurisdictions other than Russia, but sanctions have made many of them unfriendly, and capital restrictions have forced many companies to refuse to pay dividends.

If the company changes its place of registration, it may resume paying dividends. This is a positive fundamental factor for quasi-Russian companies in the long term, but may lead to increased volatility over a short period of time. “Many holders of securities in the external circuit will have access to the sale of shares on the Moscow Exchange. So, in the first days after redomiciliation, strong drawdowns in quotes are possible,” notes Vasily Karpunin. On the other hand, this could be the best time for long-term investors.

Vitaly Gaidaev