Sectors of the Russian Market: What It Is Made Of

A sector is not an industry label but a group of companies whose revenue depends on the same external condition. That is why splitting the Russian market into sectors answers a practical question: what exactly has to change in the economy for a stock to be repriced. For a commodity exporter it is the exchange rate and the global price of the commodity, for a bank and a developer it is the interest rate, for the power grid companies it is a tariff decision, for retail it is the real income of the shopper. Two businesses from different industries can behave almost identically if a common driver stands behind them, and the reverse is also true: neighbours in the formal classification diverge when one earns its revenue in foreign currency and the other in roubles.

What turns a set of stocks into a sector

The working test is a shared source of money and a shared set of risks. If a change in a single external variable shifts the revenue of the whole group at the same time, it is a sector in the economic sense rather than in the reference-book sense. An uncomfortable conclusion for the portfolio follows from this: a set of stocks from different industries looks diverse, yet it may be built as a single bet — for example, a bet on the commodity cycle, if oil producers, steelmakers and fertiliser producers sit side by side in it. Diversification is counted by drivers, not by names.

Exports versus domestic demand: the main dividing line

The Russian market is easier to read not by the list of industries but by where a company's revenue arises. For exporters of commodities and metals it is tied to foreign currency, while a considerable part of costs and taxes remains in roubles: a weaker rouble widens the margin mechanically, without any growth in physical volumes. The other side of this is sensitivity to global demand, to logistics, to export duties and to discounts, none of which depend on the quality of management.

The domestic part of the market works differently. Retail, telecoms, banks and electric utilities live on rouble revenue, and the exchange rate reaches them through costs — equipment, imported goods, software. For them a weaker rouble is more often a minus than a plus. The easiest way to see what this looks like in actual reports is the digest of disclosures in the financial reports section: the structure of revenue and the currency breakdown are visible there better than in any retelling.

The interest rate as the second dividing line

The interest rate divides the market almost as sharply as the exchange rate does. A bank earns on the difference between the price of funding and the price of lending, and a rapid rise in the rate first hits the margin and then the quality of the loan book. A developer depends on the availability of mortgages and on the cost of project finance. Heavily indebted industrial companies hand over in interest what would otherwise have gone to shareholders. For comparison: {{instrument:SBER}} and {{instrument:MTSS}} respond to the same rate decision through different channels — through the net interest margin and through the cost of debt respectively.

Where the money goes while the rate is high is described separately — see money market funds. The logic of the regulator's decisions, which set this backdrop, is examined in the article on what the Bank of Russia controls.

The state, the tariff and dividends

Some sectors are built so that their revenue is not market-based but set: the power grid companies and infrastructure operate under a tariff that is approved rather than traded. For the shareholder this means predictability in exchange for a capped upside.

The second state mechanism is ownership of equity. Where the major shareholder is the state, the payout to shareholders becomes part of the budget process, and dividend policy in such a company changes for a different reason than in a private one. See the nearest announced payouts in the dividend calendar: {{dividend_calendar|limit=5}}

Why multiples are compared only within a sector

Valuation ratios make sense within the boundaries of a single sector, because the cash flows behind them are different in nature. Compare 45,75 and 3,77: the difference here does not say that one stock is cheaper than the other, but that a cyclical export cash flow and an interest margin are valued by the market under different rules — with a different risk premium and a different durability. Within a sector the same comparison is already informative: it shows what the market pays a premium for in one company relative to its direct peers.

Concentration: the market is sliced unevenly

The Russian equity index is not made up of equal shares of industries. The weight of the commodity block and of the largest financial institutions noticeably exceeds the weight of the consumer sector, technology and transport combined. The practical consequence: "buying the whole market" means buying predominantly the commodity cycle and the interest rate. The current structure by security can be seen in the list of stocks, and the alternative in the form of the debt market — in the bonds section and separately for OFZ, where there is one driver: the yield curve.

How to check a sector step by step

Step 1 — find out in which currency revenue arises and in which currency costs arise. Step 2 — determine what a rate rise means for the company: income or expense. Step 3 — understand who sets the price: the market, a tariff or a contract. Step 4 — establish who the major shareholder is and how this affects the distribution of profit. Step 5 — check the nearest corporate events against the calendar and the news flow in the news section. Unfamiliar terms that come up along the way are in the glossary.

A caveat

The sector map explains through which channel a change arrives, but it does not predict the direction. In periods of crisis correlations converge, and stocks from different sectors begin to move together — how this happened on the Russian market is examined in the article on crises. Allocation across sectors reduces dependence on the specific risk of a single industry and does not reduce market risk; the problem of money that cannot be lost is solved before buying securities, not inside the portfolio.

{{callout:warning}}Belonging to an industry is no guarantee of how a stock will behave. A company from a "defensive" sector may underperform the market because of debt, a legal dispute or a decision by the major shareholder.{{/callout}}