The world’s most generous dividends are going a-begging as the strongest quarterly rally since 2012 in emerging markets leaves Russian stocks behind.
Investors are ignoring an estimated payout of 5.3 per cent in the next 12 months as they dump Moscow-listed shares on concerns the United States won’t ease sanctions on Russia as quickly as previously expected.
The dividend yield is the highest among markets with at least $100-billion (U.S.) in capitalization, and is even higher than sovereign-bond yields. But Russia still struggles to attract inflows.
As the performance gap widens between Russia and other emerging markets, the case for buying Moscow shares is getting stronger. Some investors are turning cautious on the rally from India to South Africa and Mexico, as valuations become expensive and volatility tightens to levels that preceded market declines in the past. If those markets stall, a portfolio with higher dividend yields – such as Russia’s – may outperform.
“In other markets, such a yield costs double in stock valuations,” said Ekaterina Iliouchenko, a money manager at Union Investment in Frankfurt, who oversees about $215-million in eastern European assets.
“While the Trump rally is over, unless oil collapses, strong crude and good corporate financial results should bring investors back to the Russian market.”
The benchmark Micex index has dropped 8.6 per cent this quarter, compared with a gain of 13 per cent for the MSCI Emerging Markets index. That’s made Russia look cheap. Micex stocks offer the highest dividends relative to their peers since 2008. Earnings estimates on the dollar-denominated benchmark, the RTS index, have increased three times as fast as the MSCI gauge in the past 12 months.
The biggest Russian equity exchange-traded fund, VanEck Vectors Russia, had an inflow of $17.5-million on Friday, the largest since Jan. 30.
But some on the Street are skeptical. JPMorgan Chase & Co. Monday cut the Russian stock market to “neutral” from “overweight,” citing the recent oil price decline and the fact that Russia is the “biggest overweight among global emerging-market investors.” This follows Bank of America Corp.’s downgrade to neutral last Thursday, which cited concerns that commodity prices may come under pressure as China tightens its monetary policy.
While Micex valuation measures are tempting, investors remain concerned about the two other factors that typically define their interest in Russian assets. They are watching the oil price outlook and the contours of the U.S.-Russian relationship.
“The high dividend yield is an argument in Russia’s favour. However, the dividend yield alone isn’t enough for the Russian market rally to resume. It needs a different trigger,” said Elena Loven, who helps manage more than $1.1-billion in Russian stocks at Swedbank Robur in Stockholm.
“I think the Russian market can go lower from current levels. Right now, the stock market isn’t so cheap anymore.
“Many investors are turning negative on oil’s prospects, the optimism that sanctions will be eased quickly has soured. People are taking profits and don’t have high hopes for the market. It doesn’t make sense to buy Russian stocks just for the sake of dividends.”
Mattias Westman, the London-based founder of Prosperity Capital Management, which oversees about $3.4-billion in assets from Russia and former Soviet republics, said “the high dividend yield is very attractive. It shows that Russian companies are highly cash-flow generative and that capex discipline is much better than some years ago.
“The market is driven by many things, including geopolitical speculation and commodity prices. But over time, only cash flow determines the value of companies and these dividends are very helpful. In addition, Russia investors will receive large dividend flows and much of this will probably be reinvested.”Report Typo/Error