Russia trading at discount

Russia is trading at a discount relative to other emerging markets, as shown by the chart below. Its next 12 month (N12M) Price/Earnings (P/E) ratio is at about 0.5 relative to other emerging markets. Russia also continues to offer an attractive dividend yield with growth potential, in Morgan Stanley’s view. At a 3.5% trailing dividend yield, Russia yields more than emerging markets as a whole that have a 2.7% trailing dividend yield. Furthermore, Russia’s payout ratio of 18.5% offers leeway for growth versus the emerging markets’ corresponding measure at 32.6%. Morgan Stanley (NYSE:MS) analysts believe that the government will probably drive dividend yields of SOEs higher to 25% of net income. In the private sector, Morgan Stanley estimates that telecom and energy will provide stable and growing dividends.

Russia relative valuation

Source: MSCI, IBES, RIMES, Morgan Stanley Research


Source: Morgan Stanley Research

Turkey fairly valued

Turkey is trading at a 13% N12M P/E premium relative to EEMEA, which suggests a fair level relative to 5 year levels and a premium relative to 10 year averages. P/BV measures look a bit more expensive, as Turkey is trading at a 58% premium relative to EEMEA, which is above the 10 year average of a (1%) discount. Discrepancies between P/E and P/BV measures suggest that markets may be discounting positive EPS expectations but underestimating risks created by higher yields and tighter monetary policy, according to Morgan Stanley (NYSE:MS) analysts. Rising inflation expectations may bring tighter monetary policy in the short term. Furthermore, higher exposure to USD due to high external denominated debt may pressure Turkey’s fiscal finances as the government will spend more to pay external debt. Furthermore, Turkish corporations with increased USD denominated debt may suffer from lower quality balance sheets as leverage ratios increase. This will likely constrain their ability to borrow and expand.

turkey still trading at premium historical relative valuation

Source: MSCI, IBES, RIMES, Morgan Stanley Research

Poland overvalued

Relative to Emerging Europe, Middle East, and Africa (EEMEA), Poland is trading at a 64% premium on a N12M P/E basis, which stands higher than its 5-year average of 34% and its 10-year average of 26%. The pricing based on N12M P/E relative to emerging markets follows a similar direction, though the overvaluation is not as blatant. On Price/Book Value (P/BV), Poland trades at a premium relative to EEMEA but trades at a narrower discount relative to EM. Overall, Morgan Stanley (NYSE:MS) analysts believe that Poland’s stock market upside may be fully priced in markets and that further appreciation may be harder to attain.


South Africa priced close to record highs

Relative to EEMEA and EM, N12M P/E are trading at steep premiums relative to their 5 and 10 year averages. The 66% premium relative to N12M P/E is 1.8 times higher than the 5 year average and 3.7 times higher than the 10 year average. P/BV ratios tell a similar story. Dividends are low relative to EEMEA but in line with EM at 3%. Rising rates and a stronger USD may drive Rand depreciation, which in turn may drive governments to direct more funds to pay external debt, which is 312% of FX reserves. Imports may also slow next year in South Africa, which may imply slower consumption, according to Morgan Stanley (NYSE:MS).

SA relative valuation

Source: MSCI, IBES, RIMES, Morgan Stanley Research

commodity price

Source: Morgan Stanley Research

SA poland

Source: Morgan Stanley Research