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Situation:
Moscow Exchange
Stock Market, Main Equity Market
Problem:
Liquidity of the main equity market is decreasing
There is evidence of the clients outflow to other international exchanges, i.e. LSE
Questions:1. Understand the nature of such decline
2. Suggest options on how to improve liquidity on the equity market
Student: Ivan Shapochkin
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Analysis of internal and externalenvironment
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Main drivers of growth are operations with REPO securities; mainequity market has fallen down by 64% from its peak in 2009
bln rub
At the moment the main equity market is in the crisis positions, nonetheless the overall stock market isgrowing.
Source: Moscow Exchange data analysis
Analysis of operations volume executed by the Top 25 operators of the stock market within 2008 2013.
0
2 000
4 000
6 000
8 000
10 000
12 000
14 000
nov
jan
mar
may
july
semp
nov
jan
mar
may
july
semp
nov
jan
mar
may
july
semp
nov
jan
mar
may
july
semp
nov
jan
mar
'08 2009 2010 2011 2012 2013
Bonds
Bonds: Main market and negotiation deals
Equities: Main market
Bonds: REPO
Equities: Negotiation deals
~1,9 bln rub decrease64%
2928
1056
Equities: REPO
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Equity market decrease is not the local problem, overall market isexperiencing decline as well. Bottom line economical downturn.
Analysis of evolution of the worlds traditional equity market by the geographical areas.
However, the main equity market of the Moscow Exchange fell down twice as much European industry.
LSE equity market lost ~25% of operational volume in 2012.
Source: Report of World Federation of Exchanges for 20124
Total
volumeofoperationsbygeographicalareas.
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1
2
3
4
5
6
0
2
4
6
8
10
Decline ~35%
Totalvolumeofoperations,bln$
Total Americas Asia-Pacific EU and Middle East
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Identification of the reasons foroperations volume decline
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What is the reason of such fast Moscow Exchanges mainequity market decline vs. competitors?
Volume ofOperations
Market Capitalization
Number of issuers Number of equities
How the number of issuers was
changing during this time frame?What are the segments of the
issuers?
Which companies have the
largest capitalization? How the capitalization was
changing?
Turnover Ratio
Number of savers Savers activity
What was the behavior of saverswithin given timeframe?
What are the types of savers?
How activity of the savers waschanging?
Was the activity changing in linewith client base growth?
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Segmentation of the main drivers of volume of operations on the main equity market.
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Main equity market capitalization is growing, but there is evidenceof outflow of companies within the last two years
Market Capitalization
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50
100
150
200
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300
350
400
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500
1 000
1 500
2 000
2 500
3 000
3 500
4 000
bln rub quantity of issuers
Analysis of equity market capitalization trends.
Decline of the quantity ofissuers in 2012 is causedby the shrinkage ofsecond and third tiresegments, while theblue chip segment isgrowing.
The main driver of themarket growth is the A1segment.
Despite the decrease ofquantity of issuers in Band C lists, the marketcapitalization is growingdue to the new emissions
by the blue chips.
212
62
17
17
198
63
11
25
194
66
14
27
293
69
13
31
241
67
11
33
223
57
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A1
A2
B
C
Capitalization of companies byquotation lists:
Quantity of issuers:
Total quantity of issuers
Quantity of issuers by thequotation lists
Why quotation lists B and C are loosing companies?
Given the fact that capitalization of list C is insignificant in respect to other lists, we will approach list B only.
Number of issuersNumber of
equities
Source: Moscow Exchange data, Reporting of companies - issuers7
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In 2012-2013 the amount of companies in the list B decreased by18% (12 companies)
Market Capitalization Number of issuersNumber of
equities
Issuers1. Companies, which have already been traded on theexchange in the list C, wishing to join the list B.
2. New clients companies, which have appropriateresources to join the B list.
3. Companies whishing to continue its trading in B list /including clients with decreasing financial performance
4. Companies, traded already in list B whishing to join thelist A2.
Analysis of the client segments with the highest churn of issuers.
Competitive threat of international exchanges because of thehigh buyers power (access to international clients, T+Ntrading, reputational factors).
Risks
Leaving the exchange due to low internal economicalperformance and inability to maintain Exchanges listing
requirements.
Low financial performance of the companies. Inability to join theB list.
Former client of segment 3: JSC Kuzbasenergo, left quotationlist B in 2013y.Capitalization: 6,12 bln rubRevenue: 31 mln rub (2011)Profit: - 2 mln rub (2011)
The company is experiencing internal economical downturn andcan not maintain Moscow Exchanges listing requirements.
Potential client of segment 2: Mail.Ru Group.Listed on LSE from 2010y.Capitalization: 7 bln USDRevenue: 466 mln USD (2011)Profit: 31 mln USD (2011)
The company preferred listing on LSE because of majoradvantages of Londons exchange.
It is highly recommended to focus on retaining the companies of segment 2 and profitable companies of segment 3, whichpotentially have high risk to issue stock outside Russia, because of strong advantages of their competitors. These companies havepotential to significantly increase capitalization and volume of operations on the exchange.
Clients of segment 3, which are leaving the exchange because of financial difficulties shall not be a priority at the moment as theyhave not got enough resources to increase the volume of operations.
Source: The Companies annual reports, LSE data 8
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Why Russian companies prefer listing on LSE to MoscowExchange?
To the moment 46% of the IPO volume of Russian companies accounts for the Main Market and AIM of LSE. LSEs AIM is targeted at emerging and developing companies and could be considered as a direct competitor of
quotation list B of Moscow Exchange.
Weak points of Moscow Exchange vs. London Stock Exchange:
pricing: MB commission in 2013 was 1,3 base points (after its reduction in Jan 2013), LSE 0,7 b.p. + ITservices/clearing = 0,9 1,0 b.p; the marginal requirements of LSE are lower.
width of the market: LSE has wider client base and offeres more instruments (investors can create complex
structures using multiple assets). infrastructure: LSE has smooth and well-adjusted internal infrastructure (central securities depositary, central
counter party, risk management, T+2 mode etc), Moscow Exchange is making the first steps in it.
To retain and attract clients to Russian markets it is crucial to develop at least the same conditions, which are offeredby the international exchanges, specifically:
Significantly improve infrastructure (finish implementation of T+N on equities market, develop a system ofcentral counter party).
Reduce pricing of the services, as this has become one of the main factors in the industry as international wallswere erased. The exchange has got huge potential to decrease pricing through the reduction of internal coststructure.
To create inflow of international investors to grow the client base and increase turnover of the instruments.
Market Capitalization Number of issuersNumber of
equities
Source: IPO prospect of Moscow Exchange, analysis of IC Aton, Moscow Exchange strategy, LSE data
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Savers became less active at the main equity market due todownturn in the Russian economy
Turnover ratio Number of savers Savers activity
10,16711,609
10,343
7,9476,787
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100
200
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900
1000
0
2
4
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14
16
18
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Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
Trust Management Clients
Non-residents
Legal Entities
Individuals (x10)
Total number of uniqe savers
Number of active savers *(000)
Number of unique savers **(000)
Analysis of savers activity.
41%
Average volume of each deal is also declining for every customer segment.
Low activity of non-residents is caused by absence of state-of-the-art infrastructure of Moscow Exchange.
The decline in savers activity is in the first place linked with their cautiousness (both individuals and companies), which areinvesting in more risk free instruments (such as bonds) and show less activity on the market given the unfavorable economicalenvironment.
* savers, which conduct at least one operation per
month
** savers registered in the system
Source: Moscow Exchange reports10
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Summary
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The only way to increase liquidity of the main equity market is toimprove the Moscow Exchanges trading conditions up to the levelof international exchanges
Decline of operational volume on the main equity market of Moscow Exchange happens on thebackground of significant destabilization of European economy. However, there are some internalfactors, which are affecting existing customers, improvement of which could help to return theliquidity:
Internal issues (could be improved):
Outflow of the clients (both savers and issuers) to the world markets caused by the competitiveadvantages of international exchanges (lower commissions, broader market, state-of-the-artinfrastructure). Improving such factors could stimulate the growth of operations on the market,which could lead to overall liquidity increasing.
If existing situation with infrastructure would not be solved, the outflow of savers and issuers tothe international markets will continue, which will downturn further the state of main equitymarket and as a consequence Russian economy in general.
External issues (Exchange has got to face it): The key reason for decline in operational volume of the main market are the non-favorable macro
economical trends; the savers face the lack of mid-term and long-term motivation for revival oftheir activity in buying companies shares and the companies for equity emission.
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