Russia Day Traders Pile in as Gains Slow After Six-Year Rally By William Mauldin and Michael Tsang http://www.bloomberg.com/apps/news?pid=20601109&sid=a2Fx.vmQSWRc&refer=home April 30 (Bloomberg) -- Speculators are increasing their purchases of Russian stocks just as six years of gains grind to a halt in the world's second-largest emerging market. Day traders, who seek instant profits from stock price fluctuations, on Russia's Micex Stock Exchange have more than doubled in the past 16 months, said Chief Executive Officer Alexei Rybnikov. Purchases and sales of less than 100,000 rubles ($3,890) by individuals make up 60 percent of trades on the Micex, compared with 4.6 percent of trading on the New York Stock Exchange. The market is already showing signs of weakening after the rally boosted the value of Russian shares 13-fold to $1.1 trillion since 2001. Russia accounts for 10 percent of all mutual-fund assets invested in emerging-market shares, according to Emerging Portfolio Fund Research Inc. The $100 billion Texas teachers pension fund and Harvard University's $29.2 billion endowment both added to Russian holdings last year. ``Anybody who has been aggressive has gotten rich in Russia, so far, that is,'' said Mattias Westman, who manages about $2.3 billion in Russian equities at Prosperity Capital Management in London. ``It's not healthy.'' The ruble-denominated Micex Index of the exchange's 30 most-frequently traded stocks has added 0.2 percent this year after an 81 percent jump in 2006. An index of the so-called BRIC nations of Brazil, Russia, India and China -- among last year's best performers --has gained just 1 percent. Russia's dollar-denominated RTS Index has risen 0.7 percent this year after surging 1,241 percent since the end of 2000. Speculation Russian regulations encourage speculation because individual investors can borrow 75 percent of a stock's value, according to Alexander Dyakovsky, a spokesman for the Federal Financial Markets Service, the nation's market regulator. That's more than in any other major emerging market except South Africa, according to data compiled by Bloomberg. In China, the biggest emerging stock market, valued at $2 trillion, investors are prohibited from so-called margin borrowing to buy equities. About 55 percent of Russian investors say day trading is a ``way to make money in their free time,'' according to a survey of clients conducted last year by Aton Capital, a Russian brokerage owned by UniCredit SpA, Italy's biggest bank. Russian President Vladimir Putin fueled enthusiasm for equities by using televised speeches and press conferences to tout shares of state-controlled companies OAO Rosneft, the second-biggest oil company, and OAO Sberbank, the largest bank. Both are based in Moscow. `Really Insane' ``The policy of letting people borrow three times more than they have invested is completely imprudent,'' said Zina Psiola, who manages more then $700 million in Russian equities at Clariden Leu AG in Zurich. ``It's just really insane.'' Day traders on the Micex rose by about 50,000 in the first three months of 2007 to 280,000, according to the exchange. That compares with 109,800 at the beginning of 2006 and 96,500 at the start of 2005. They are increasing as overseas investors put more money into Russian stocks. Mutual funds investing in emerging-market shares had $12.7 billion in Russian equities at the end of March, or 9.6 percent of assets, according to Emerging Portfolio Fund Research, which tracks 15,000 funds with more than $7 trillion. At the end of 2000, Russian stocks made up 2.6 percent of the total. Texas, Harvard The Texas Teacher Retirement System has $254.5 million invested in 13 Russian companies including OAO Lukoil, the biggest oil producer, and OAO VimpelCom, Russia's second-largest mobile-phone company, according to filings with the U.S. Securities and Exchange Commission and fund spokeswoman Juliana F. Helton. Companies in Russia are the fund's fifth-largest emerging market holding. Harvard's endowment, the biggest for any university, added to stakes of Rostelecom, the country's largest long-distance telephone company, and VimpelCom at the end of last year. Lukoil, VimpelCom and Rostelecom are based in Moscow. Mark Mobius, who oversees $30 billion in emerging-markets equities at Templeton Asset Management in Singapore, says more transparency in Russian day trading is needed, and he is avoiding shares of smaller companies. ``It's going to be a mixed picture in the Russian market,'' Mobius said in an interview from Paris. ``We have to be very selective.'' Magnified Losses Borrowing to buy stocks can magnify gains and declines. When prices fall, investors have to deposit more funds or sell shares to meet so-called margin calls from their brokers. Margin calls contributed to a 12 percent drop from Feb. 27 to March 5 when losses in China triggered a global decline in equities, according to Julian Rimmer, head of sales trading at UralSib Financial Corp., a unit of Russia's biggest privately owned bank. ``Once you hit the limit, you have forced selling of positions,'' he said. Leverage preceded other financial disasters, including the U.S. stock-market crash of 1929, which led to the Securities Exchange Act of 1934. The SEC's regulation T prevents investors in the U.S. from borrowing more than their equity level, meaning someone with $10,000 can purchase only as much as $20,000 in stock. Day traders also fed speculation during the Internet boom in the 1990s and the subsequent 78 percent tumble in the Nasdaq Composite Index. No 1998 Nobody is predicting a financial disaster in Russia like the 1998 government default on $40 billion of ruble-denominated debt and subsequent currency devaluation that led to the collapse of major banks. Hundreds of thousands of Russians saw their savings wiped out. Individual investors' participation in Russian stocks is a healthy sign, said Bill Browder, managing director and founder of Hermitage Capital Management Inc. ``The next big catalyst for this market is going to be the retail investor,'' said Browder, a shareholder activist who oversees $3.2 billion in Russian stocks from London, where he's worked since November 2005 after being barred from Russia under a law which denies entry to people who might threaten ``the security of the state, public order or public health.'' Browder says the prohibition followed his campaign for shareholders' rights at Russian companies. ``When people get a taste for making money on the stock market, that will be the big driver,'' he said. Browder's fund climbed 25 times over the last 10 years. Never Stronger Russia's economy has never been stronger. Boosted by commodities exports, international reserves surged to $361.2 billion from $12 billion in 1998 and are now the world's third- largest behind China's and Japan's. The oil and gas industry accounted for 22 percent of gross domestic product last year, according to Moscow-based Renaissance Capital. GDP expanded 6.8 percent in 2006, more than twice the rate in Europe. ``The economic picture in Russia is still very sound,'' said Samuel Oubadia, who helps manage $3 billion in Russian and emerging market stocks at ING Investment Management in The Hague. ``There's strong economic growth, a surplus in the budget, which not many countries even in the developed market have.'' Russia's borrowing rules are looser than in most emerging markets. China doesn't let brokerages lend money to clients for so-called margin trading. Indian regulators approved rules in January 2004 allowing individuals to borrow an amount equal to their equity. South Korean rules require buyers to put up 30 percent to 50 percent of a stock's value. Unheeded Risk Investors don't appreciate the risks in Russian stocks, said James Fenkner, managing partner at Red Star Asset Management in Moscow. A measure of volatility on the Micex Index dropped 32 percent since stocks slumped in February and now is the lowest in a year, according to data compiled by Bloomberg. The gauge is based on performance during the previous 200 days of trading and shows how much the index might fluctuate, indicating the perceived risk of investing in the market. ``You magnify gains with leverage when markets go up, but you magnify losses when markets go down,'' said Fenkner, who helps oversee about $100 million in eastern European stocks at Red Star. ``You only find out who's swimming naked when the tide goes out.'' Alfa Bank, Russia's second-largest privately owned lender, is limiting investors to $2 of borrowing for every dollar of equity. The bank requires the collateral to be invested in the biggest companies. ``There is a lot of money going in there, so a lot of money can go out,'' said Jonathan Asante, who helps manage $19 billion of emerging-market and Asian equities at First State Investments Services in Edinburgh, and doesn't own any Russian shares. ``If retail investment is picking up, then that's also a sign of markets being very toppy.''