The stock market has updated at least in three years. What does this mean for an investor

The main thing in the material:

— The Moscow Exchange index has updated its minimum in more than three years, but its decline reflects a change in investor sentiment rather than a systemic deterioration in the Russian economy.

— High yields on deposits and government bonds have increased the flow of capital from stocks to more conservative instruments. The decline in quotations was prompted by automatic sales on stop orders and the work of trading algorithms.

— The market recovery will depend on the trajectory of the key interest rate, the ruble exchange rate and the financial results of the largest public companies.

— Analysts advise private investors not to try to guess the bottom of the market, but to gradually form positions and diversify assets in the portfolio.

In June, the Moscow Exchange index dropped to its lowest values since the spring of 2023. Against this background, concerns about further dynamics in the stock market have increased again in the market. Such movements are often perceived as an alarming signal for the economy and business. However, some market participants consider the current drawdown to be an excellent opportunity to buy quality assets cheaper. Izvestia investigated what the drop in the index actually shows and what consequences the current sale may lead to.

Not the economy, but the mood

Following the results of trading on June 22, the Moscow Exchange index fell to 2,318 points, the lowest in more than three years. This day has already been called "Black Monday". By June 26, the index had sunk further, dropping below 2,300 points. Since the beginning of the month, the decrease has exceeded 13%, and since the beginning of the year — 19%. By itself, this situation is not a direct measure of the health of the economy. The index reflects the weighted average value of the shares of the largest companies traded on the stock exchange. It shows how much investors are willing to pay for a business today, rather than how much companies actually earn.

Given that the Russian market has become less institutional in recent years, it primarily reflects the mood of private investors who are not ready to buy assets for years to come and calmly experience drawdowns. Therefore, the current sale only indicates that market participants have temporarily preferred other financial instruments. After the Bank of Russia lowered its key rate by only 0.25 percentage points (investors expected a sharper step), the market adjusted forecasts for further interest rate dynamics. As a result, the attractiveness of deposits and government bonds offering double-digit yields has increased. That's where some of the investors probably shifted their money.

A chain reaction began in the stock market: investors began to sell shares, quotes declined, after which stop losses were triggered - automatic orders to sell securities when a certain price was reached. Then trading algorithms that respond to the acceleration of the fall joined the movement. As a result, a vicious circle has formed, when a decline generates a new decline. Similar processes occur in all markets. But in the context of a limited number of large institutional players, they become especially noticeable.

The money goes to a place where the flow is clearer

Given that the Russian stock market belongs to the so—called dividend markets (where a significant part of an investor's income is generated not by rising quotations, but by regular payments to shareholders), in recent days some analysts have attributed the decline in the index to dividend cut-offs - dates after which new buyers of shares no longer receive declared dividends. After the cutoff, the price of the paper usually drops. However, the main dividend season in Russia is just entering its active phase. Many of the largest payers have not even held shareholder meetings yet. In particular, Sberbank, which remains a significant source of dividend income for many private investors, is holding its annual meeting on June 30.

In addition, it is not entirely correct to consider the Russian stock market solely through the prism of the price index. If an investor owns securities and regularly receives dividends, then part of the decrease in the value of shares is compensated by payments. That is, the dynamics of the index does not always reflect the real financial result of the investor. In this regard, professional market participants emphasize that for a long-term investor, it is not the index chart that is more important, but the ability of companies to maintain profits, cash flow and pay dividends. Therefore, the current decline in quotations reduces the entry price rather than destroys the investment idea: if the dividend policy is maintained, the fall in the share price automatically increases the dividend yield for the new buyer.

In this sense, the decline in the index largely reflects the redistribution of money within the financial system. If the rate of the Bank of Russia continues to decrease, then part of the capital may transfer from deposits and government bonds back to stocks.

What will change after the fall

By itself, the decrease in the Moscow Exchange index does not directly affect either the ruble exchange rate, salaries, or prices in stores. For most Russians, the movement of the stock indicator remains an exclusively financial market event. But it should be understood that when stocks become cheaper, the market value of companies decreases. If a business decides to raise funds through the issuance of new securities, it will have to sell a larger share of ownership to investors in order to receive the same amount. This makes market financing less profitable and may limit companies' ability to invest in expanding production, launching new projects, and developing technology. Conversely, the higher the capitalization of public companies, the easier it is for them to raise capital through the stock market. In the long term, this creates an additional source of financing for the economy. Therefore, the government has been betting on the development of the stock market in recent years. In a message to the Federal Assembly in February 2024, President Vladimir Putin announced the need to double the capitalization of the stock market to 66% of GDP by 2030 (in 2023, Russia's GDP amounted to 172 trillion rubles).

For issuers themselves, the decline in the index becomes a serious problem if it reflects a long-term deterioration in financial results. Individual industries, primarily exporters of oil, gas, metals and chemical products, are now really facing a deterioration in the market: a strong ruble reduces revenue, high interest rates increase the cost of financing, and sanctions restrictions continue to affect foreign trade. However, there is still no reason to talk about a systemic deterioration in the situation of the entire Russian corporate sector.

What should an investor do?

After the index has updated its three-year low, investors are trying to figure out when the market will start to recover. However, it is impossible to determine the exact moment of the reversal in advance. It makes sense to talk only about the factors that can change the dynamics.

The first is the decisions of the Bank of Russia. If inflation continues to slow down and the regulator accelerates the reduction of the key interest rate, then demand for stocks is likely to grow.

The second is the ruble exchange rate. For exporting companies, a weakening of the national currency would mean an improvement in financial performance, which could support investor interest in their shares.

The third is corporate reporting and dividends. Strong financial results and continued shareholder payouts may convince investors that the current correction is not related to business deterioration. Then the demand for stocks may increase.

At the same time, the risks of a further decline in the index remain. If the period of high interest rates turns out to be longer than the market expects, government bond yields remain in double digits, and pressure on exporters increases, the market may seek a new equilibrium for some time. In this case, the recovery will be gradual rather than abrupt. But the market participant does not need to guess when this will happen, it is more important for him to determine the strategy and investment horizon.

Short-term traders are advised to reduce their activity and give up trying to react to every market movement. In such periods, risk control and decision-making discipline come to the fore.

For a long-term investor, the approach is different. Decisions are made not based on the current market dynamics, but based on the quality of the business and the willingness to maintain a position over the horizon of several years, since even high-quality stocks can remain under pressure longer than the market expects.

In general, investors are advised to form positions gradually, distributing purchases over several months, as well as diversify their portfolio between different asset classes. Against the background of high interest rates, it makes sense to combine stocks with federal loan bonds and deposits. This approach allows you to earn a stable interest income and at the same time keep the opportunity to take advantage of the stock market recovery.

The theses contained in the text are not an investment recommendation, but the opinion of the editors.