Page 85 - RusRPTNov19

8.3 Stock market
8.3.1 Equity market dynamics
The RTS hit a nearly six-year high in the last week of October.. The RTS climbed to 1,414 on October 25, its highest level since December 2013. On the d/d trading, Surgutneftegaz commons (+8.1%), Mail.ru Group (+4.9%) and KAZ Minerals (+4.9%) were the leaders in Russian/FSU stocks. Looking at only the most liquid shares, Nornickel (+3.3%), EPAM Systems (+3.3%) and Gazprom (+2.9%) were at the top of the performance table. VEON (-4.0%), Evraz (-3.4%) and Ferrexpo (-2.3%) lagged behind, while NLMK (-0.7%) and Rosneft (-0.2%) were most sluggish among the typically most liquid.
The Russian eagle: the Russian equity market boasts the highest yields in a world of low rates and remains the best performer globally, with the RTS index up 36% YTD in total return terms versus 7% for the MSCI EM.
Even after the rally, Russia's dividend yields look attractive, with the aggregate 6.7% near a historical high for Russia and more than 2 pp higher than the next highest yielding equity market. Equities also look attractive compared with local and FX-denominated debt.
Sustainable payouts. When the market assigns such a high yield to an asset, it implies that payouts are unsustainable. However, we demonstrate that Russia's dividends have little downside risk, instead having more risk on the upside. The only big concern is commodity prices, a perennial issue for this market, though recent government efforts to decouple economic indicators from the oil price have diminished this risk as well and thus made it cheaper to hedge against.
Turnaround in macroeconomic policy. In the past five years, Russia has been going through a period of tightening, with high real rates and fiscal consolidation. This era seems to be passing, however, as monetary policy is moving toward neutral and the budget implies no further tightening. The fixed income market has already factored in this trend shift, with OFZ yields shrinking some 200 bps YTD. The equity market, however, has yet to price it in.
What can drive valuations higher? Russian equities are the second largest overweight for GEM investors, meaning that these funds would struggle to increase their Russia allocations. Meanwhile, more narrowly focused funds (i.e. EMEA, country-dedicated) have long been suffering outflows, and not only among Russia investors. Hence, obvious sources of incremental demand would rather be global funds (and other total return funds) or local investors. Expanding Russia allocation seems particularly attractive as funds hunt for yield in the current global environment. As for local investors, they may increasingly be pushed toward equities as local bond yields are rapidly shrinking, just as in the past these investors expanded out of deposits and into local debt.
85 RUSSIA Country Report November 2019 www.intellinews.o