Value Investing

Russian Investment Opportunity Underpinned By Strong Dividend-Paying Stocks

The revival of the Russian investment opportunity underpinned by strong dividend-paying stocks opines Renaissance Capital

Below are some highlights from Renaissance Capital

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  • The Russian market has outpaced the MSCI Emerging Market index over the past three months, having jumped approximately a tenth in dollar terms.
  • Many have interpreted the recent reappearance of Russian IPOs as a clear indication of the Russian market coming back to life; last week, En+ Group, the aluminium and power company, listed on the London Stock Exchange, whilst Obuv Rossii and Polyus also held notable listings earlier in the year. Many analysts have predicted that this trend of IPOs may continue into 2018, as international investors warm to the idea of Russian equity investment after several challenging years.
  • However, another key aspect of the attractiveness of Russian companies may lie in their dividend pay-outs, where Russia remains a global leader – the MSCI Russia index was trading with an average dividend yield of 5% as of the start of November – double that of the broader MSCI EM index, which stood at 2.3%.
  • According to Renaissance Capital, the Russian market is the cheapest among Emerging Markets in absolute terms (12M FWD P/E of 6.5x) and has the highest dividend yield of any major EM.
  • Amongst those listed in London, En+ Group announced in October 2017 that it has approved the payment of USD $125mn in interim dividends to shareholders in December 2017, while it was recently reported that Evraz, the metals and mining company, has paid its first dividend in three years
  • Please see below for a selection of the top 12-month dividend expectations amongst Russian companies.
Russian 12 month dividend expectations >5%
Stock Price, RUB/s 12MF DY
Enel Russia 1.3 11.2%
Severstal 911 10.9%
Rostelecom pref. 53 9.7%
Norilsk Nickel (DR) 1,126 9.6%
NLMK 134 9.5%

Source: Bloomberg, BCS

Investment summary from Renissance Capital

Happy 30th birthday, emerging markets!

At the end of 2017, emerging markets (EM) will celebrate their 30th birthday, with the inception date of the MSCI EM Index being 31 December 1987; Frontier will be a decade old. Of course, EM investing actually goes back much further, with perhaps the first recorded financial crisis in EM taking place in the 4th century BC. But it was the late 1980s, when the introduction of Brady bonds drew a line under the Latin American debt crisis – together with FX liberalisation, and the easing of restrictions on foreign portfolio investment, this paved the way for global EM equity portfolio investment as we know it today. At inception, MSCI EM contained just 10 countries (Mexico, Argentina, Brazil, Chile, Greece, Jordan, Malaysia, the Philippines, Portugal and Thailand). The index at the time had no China (mainland exchanges were yet to open), no Central Europe (the Berlin Wall was yet to fall), no South Africa (which was still under apartheid), and no India, Korea or Taiwan (which were in effect cut off to foreign investors). The asset class, at sub-1% of global equities, was an easy one to ignore. Today, EM represents 11% of global equities.

Renaissance Capital notes the following in their summary –

1. Should investors remain bullish into 2018? Our YE17 MSCI EM target is 1,205 (+7%), and for YE18 1,340 (+11% for 2018) which anticipates no further re-rating. We see 10 good reasons to remain engaged:

i. Quality of the 2017 rally – 2017’s EM rally has been overwhelmingly earnings-driven

ii. Still attractive relative valuations for EM vs DM – EM is trading 0.7 standard deviations (SD) cheap (on 12M forward P/E) vs DM on a 10-year basis

iii. EM EPS recovery – consensus expects EM EPS growth to exceed DM in 2018 and 2019; EM RoE to exceed DM in 2018 and 2019

iv. EM economic acceleration vs DM – usually a good signal for EM – in 2019-2022

v. Synchronised global growth – all the top-50 global economies expanding for the first time since 2007

vi. Global trade has been picking up in recent months; EM and DM economic surprise indicators both positive

vii. US CPI well below the 3% danger zone for EM

viii. US expansion mature in duration, but not in GDP growth from the cycle trough to date

ix. Less than half of EM’s 2013-2016 equity outflows have returned to the asset class

Under one-quarter of EM’s 2011-2016 underperformance vs DM has been recovered

What worries Renaissance Capital? The dollar (monetary policy normalisation from the Fed vs an accommodative stance from the European Central Bank (ECB); potential US tax reforms to encourage repatriation of offshore cash); Trump; geopolitics and the long duration of the US cycle. The lack of exposure in MSCI EMEA to listed tech (IT is 0% of MSCI EMEA, 28% of MSCI EM).

 

 

Recommendations from Renaissance Capital

EM – EMEA

OW: Russia, Egypt N: South Africa, Greece, Poland, Hungary, Czech, UAE UW: Turkey, Qatar

Upgrades: Egypt (OW from N), UAE (N from UW) Downgrades: Turkey (UW from OW), Poland (N from OW), Hungary (N from OW)

Russia (OW maintained) – Oil at $60/bl reinforces our OW on Russia. MSCI Russia is one of only three MSCI EM constituents in negative territory YtD. The economy is recovering, the consumer is now back in positive territory, the rouble is well supported by a current account in surplus plus high real interest rates. The key rate is currently 8.25% and our Russia/CIS economist, Oleg Kouzmin, expects 7.00-7.25% by end-2018; and growth of 2.0% (assuming $50/bl oil) in 2018 and 2.3% (at $55/bl oil) in 2019. We expect a reform programme to be announced after the March presidential election which (even if unlikely to fully satisfy free market economists) could boost growth to 2-3%. The 2018 Ease Of Doing Business survey saw Russia ranked 35th in the world, a five-place improvement from the previous year. The market is the cheapest in EM (12M FWD P/E of 6.5x) and has the highest dividend yield of any major EM. Fundamentals warrant a ratings upgrade (however the intensification of sanctions makes us doubt that the US agencies will move). The main risks are oil, the ongoing US investigations into Russian influence in the US presidential elections (and any potential associated sanctions) and geopolitics; GEM investors are already OW.

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Central Europe (Poland N from OW, Hungary N from OW, Czech Republic N maintained) – Central Europe has been an impressive performer in 2017, with Poland the top-performing market in EM YtD, as a rebounding eurozone has combined with a still dovish ECB and as wage growth has picked up across the region as unemployment has fallen, leading to a sweetspot of still low rates, and low inflation but improving export markets and consumption. We like the growth story heading into 2018; eventual rate hikes are likely to support margins in the region’s banks. However, following 2017’s very strong performance we bring back our ratings to N in Poland and Hungary, and maintain N for the Czech Republic.

Russian Dividend-Paying Stocks Renaissance Capital