Page 60 - RusRPTOct19

8.3 Stock market
8.3.1 Equity market dynamics
Russia’s equity market is the best performing in the world, with the RTS index up 36% year-to-date in total return terms versus 7% for the MSCI EM (emerging markets), Sberbank CIB wrote on September 27.
"Even after the rally, Russia's dividend yields look attractive, with the aggregate 6.7% near a historical high for Russia and more than 2pp [percentage point] higher than the next highest yielding equity market," the analysts comment, adding that "equities also look attractive compared with local and FX-denominated debt."
Sberbank admits that usually when the market assigns such a high yield to an asset, it implies that payouts are unsustainable, but argues that Russia's dividends have little downside risk, instead having more risk on the upside.
The major concern for Russian equities is commodity prices, but recent government fiscal efforts to decouple economic indicators from the oil price have diminished this risk as well and thus made it cheaper to hedge against, the analysts believe.
In the meantime the tightening of the past five years with high real rates and fiscal consolidation is seen as coming to an end, with monetary policy by the central bank moving towards neutral and no signs of further budget tightening, Sberbank notes.
"The fixed income market has already factored in this trend shift, with OFZ yields shrinking some 200bp [basis points] YTD. The equity market, however, has yet to price it in," analysts Andrey Kuznetsov and Cole Akeson argue.
They suggest to focus mainly on dividend stories, with top picks from this perspective being Lukoil, Gazprom Neft, Norilsk Nickel and Moscow Exchange. Top picks beyond the dividend theme are Novatek and Yandex.
August stock market was stormy. Investors who had been waiting for the summer doldrums to result in quiet financial markets have been in for a shock. August capped another volatile month on the global markets. The trigger points for a negative change in investor sentiment can be traced to Fed Chair Jerome Powell’s description of the latest 25bp rate cut as a ‘mid-cycle adjustment’ and the imposition of extra tariffs on China at the beginning August. The Sino-US trade war intensified further, when China announced retaliatory tariffs on US goods on 23 August. The US administration did not wait and immediately responded by raising existing and announced tariffs. Most recently, however, both sides have tried to de-escalate tensions and resumed negotiations.
Russia’s stock market rallied in the second quarter of this year, up some 30% since January, and broke through the 1,400 level briefly in June for the first time since the annexation of the Crimea in 2014. Stocks have rallied strongly this year but the outlook for the rest of the year is hazy and investors are only looking a few names rather than the market as a whole.
The outlook for Russian stocks should be good. As bne IntelliNews has reported both the banking sector profits and the corporate sector profits are making the best profits seen since the onset of sanctions as the economy is clearly recovering, at least as far as listed companies are concerned, even if the macroeconomic growth remains subdued.
“Russian stocks are among the best performers YTD across EM. The MSCI Russia has gained +30% YTD, holding its position as one of the leaders in the EM space. The RTS index tested the 1,400 level in June, returning to the area near our base case YE19F target of 1,250 in August. We keep that target
60 RUSSIA Country Report October 2019 ww.intellinews.com