Russian market analysis gets a thumb's up

Issue Number: 
Christopher Kenneth

There was a time when only members of the Politburo and the KGB’s anti-economic-crimes department knew the exact value of Russian equities. The country’s industrial output was a state secret, and even the CIA and other foreign intelligence services were fooled into believing the spin of the Soviet communist-propaganda machine – and adding misunderstandings of their own.

Later, in the early 1990s, the absence of informed market analysts made it extremely difficult to carry out quality due-diligence studies of Russian companies.

At that time, it was a common practice for foreign investors interested in post-Soviet Russian equities to hire market analysts or research firms based abroad – mainly from New York, London, Paris, Frankfurt am Main or Geneva – to provide the needed information.

These expensive experts gave traditional textbook recommendations on Russian equities, a Russian equities analyst said on condition of anonymity.

"More often than not, the requested data were gathered extra-territorially or through third parties, as the ‘experts’ were working from air-conditioned offices in their home countries, without even coming to Moscow, not to mention the rest of the country," he said.

Today, Russian-trained business analysts have attained the level of maturity needed for top-rate market analysis, observers say. A number of them have outperformed their foreign colleagues in several aspects, winning top positions in a Thomson Extel survey released earlier this year on the best market analysts and brokerages for 2003.

The survey – which traditionally provides a detailed and independent assessment of the European investment community – is the fifth carried out under the Thomson aegis since it acquired it from The Financial Times in 1998. It was the 30th since its inception in 1974.

Commenting on the importance attached to market research in general and Russia-based brokers- performance in particular, Steve Kelly, head of the Thomson Extel survey, told The Russia Journal from London that the performance of Russian brokerage firms and analysts in 2003 was the strongest in the agency’s history.

Kelly also said that, since 2000 – when UBS Brunswick, the then-highest-ranked Russian firm for pan-European services, could not even make it to the Top 50 in the overall rating – each succeeding year has since seen a steady improvement among the country’s firms.

Thomson Extel staff say that they were not surprised by the improved performance of Russia-based experts in 2003, Kelly said. "We-ve been tracking the trends, and the writing was on the wall," he added.

However, he noted that they were astonished by the extent of the improvement. "We knew there would be more interest, but were surprised that it was so much more than we had expected from Russia. They had shown hard work and provided good services to their clients. This is what creates winners everywhere – and not just in Russia," he said.

Russia’s equity-research market comes of age

Anyone who had earlier forecast that Russia-based business analysts would make such impressive showings in market analysis after only a decade, outperforming their more-experienced counterparts, would likely have been dismissed out of hand. However, that is exactly what has happened.

This was true not only in the oil and gas sectors, where Russia-based experts learned the tricks of the trade earlier and are, therefore, traditionally strong, he added, Kelly said.

Some Russian analysis groups went further to win in key areas, including best overall brokerage firm and best brokerage firm for equity and equity-linked research.

Such outstanding results obtained within so short a time have prompted domestic and international observers to claim that the growing Russian equity-research market has come of age. In the survey, Russian firms were able to secure enough of over 97,000 votes from 913 fund-management firms, overseeing assets worth about $9.66 billion, to beat their opponents from 308 brokerage firms. Two hundred and six large European companies, with a combined market capitalization of $2.22 trillion, also took part in the survey.

Highlighting what he said were the main reasons for Russia-based analysts- outstanding performance, Kelly said that emerging markets in general – and Russia in particular – are assuming increasing importance for international investors. "Also, the maturity of Russia’s equity markets has led to an improvement in the standard of services."

Russian analysts filled with pride and praise

Russia-based investment-analysis teams praised the results, saying that "they reflected hard work, commitment to the industry, comprehensiveness of reporting and usefulness and appropriateness of recommendations."

Peter Boone – head of the research department at UBS Brunswick Moscow, which won most of Russia’s top spots in the survey – said Russian firms did well because they had the opportunity to work in a market that had a strong year after three difficult ones.

It was also helpful, many said, that Russian was one of the languages used in the survey, giving Russian CEOs the opportunity to vote for their analysts.

Also in an upbeat mood, Jennifer Buttenheim, head of the external-relations department at United Financial Group (UFG) – another winner in several categories – said the result was special for UFG because it was the first Russian and the only single-country-focused firm in the Top Tier Pan-European Investment Banks category.

"We are particularly pleased with the results because they were based on clients- responses, which reflects the excellent quality of our research and the value placed on it, with UFG analyst Christopher Granville having been voted second-best in Russia," she noted.

UFG also performed well in other categories, including being named the second-best oil-analysis team on emerging markets. UFG’s Stephen O’Sullivan was also voted second-best analyst, beating out others from Central and Eastern Europe, Africa and the Middle East.

"Russia-based research firms’ excellent performance in the survey underscores the growing importance of the Russian economy as a whole in the global marketplace," Buttenheim said.

She, however, declined to name other top analysts on the market, saying that "it goes against our company’s policy: UFG does not comment officially or anonymously on the merit of its competitors."

However, while also praising the results, James Fenkner, the head of research at Troika Dialog, another top performer in the survey, noted that they could have been influenced by subjective factors. "One little minus in a survey of this nature is that its results can be a bit deceptive in the sense that some of the winners won on the strength of their reputation and not necessarily because of the quality of their research work," he said.

No more difference between Russian and expat analysts

Local analysts say the results have proven that they have mastered the trade and are now in a position to provide comprehensive research services to equities investors in and outside the country.

In the past, the traditional approach to market analysis in Russia was that institutional investors brought along their own analysts, who had a better understanding of equity markets and the tools and knowledge to analyze them. Now, the situation is different, said Alexander Kantarovich, chief strategist at Aton Capital, one of the overall winners in the survey’s research category.

"There is today no significant difference between Russian analysts and those in more-developed markets in terms of comprehensiveness of market coverage," said Kantarovich.

Russian brokers now cover the local market better than any Western firms that are not physically based in the country, he added. This is because, by being locally present, Russia-based firms are more focused, provide fuller coverage and are faster in responding to market changes.

Acknowledging that, in the past, foreign staff were the locomotives of the Russian market-research industry, Kantarovich said that the "foreign" factor no longer plays a significant role. "As far as the local equity market is concerned, local analysts are far better than most foreigners because they have a better and deeper understanding of the market," he explained.

Others agree. "The contribution of foreign and local staff in our company’s overall output is mixed," Fenkner said. "Of course, some [Russian] companies still use a colonial principle in which a few expats are put in key positions while their Russian colleagues do the real groundwork. At Troika Dialog, the approach is different. This is why it was really a great pleasure that some of the Russian-born experts such as Andrei Ivanov won in this international survey."

UFG’s Buttenheim, a U.S. citizen with more than 10 years’ experience on the Russian equity market, also refused to credit all the glory to expats. "Suggesting that these results were possible only because the equity-research market is filled with foreign-trained experts [reflects] an outdated, stereotypical way of thinking," she said.

Citing UFG’s research team of five expats and 11 Russians as an example, Erik Wigeatz – who co-heads the company’s research department – attributed their success in the survey to a good mix of local and foreign staff.

One of the local experts, UFG oil and gas analyst Pavel Kushnir, was voted in the survey to be a "Rising Star Analyst in Pan-European Coverage of Emerging Markets." "The prize is one of the most important awards given to independent analysis teams covering Russia, and the implications of the award are that investment managers voted me as the future of the profession. And I hope to meet their expectations and rise all the way to the very top of the profession," he said.

UBS’s Boone, a Canadian, also refused to buy the expat-superiority notion. "Foreign analysts work in Russia, just as there are many analysts working in the United Kingdom that are not British," he said.

Specific problems on the Russian research market

Experts analyzing the local equity market complain of problems that limit their work and differentiate the industry from that in more-developed markets.

Wigeatz noted that a major difference between working in the equity-research market in Russia and in the West is that the majority of Russian companies do not publish their earnings. Therefore, analysts have to dig deeper to arrive at their data, he said.

"However, while this is an unwanted difficulty, it has its own advantages – such as an improvement in the quality and authenticity of such reports," Wigeatz said.

Troika Dialog’s Fenkner agreed. "One of the biggest problems here is in the sphere of disclosure of corporate data. Though there has been a significant improvement in past years, a lot still needs to be done to be on par with more-developed and highly regulated economies."

Aton Capital’s Kantarovich said there is still a problem of lack of an adequate legal base to regulate the market, which, on its own, is still relatively underdeveloped. "This loophole creates a framework for business violations in the industry," he said.

Another issue, which stems directly from lack of adequate regulation, is that crimes such as insider trading, doctoring reports and fronting for other companies are still rife here and often go unpunished, other analysts note.

In addition, most analysis firms have yet to segregate their consultancy, marketing and brokerage from other services they provide to their clients in the Russian equities industry, as is now required on the U.S. market.

It is also not clear when these will be eventually effected – a phenomenon that does not seem to matter to local analysts, who are currently savoring their moment of triumph on the global arena.