Russia's dividend yields quell sanctions fears as stocks break records
* Dividend yields surpass bond yields for first time
* Russia's CDS price at all-time low
* Sanctions risk has had limited effect on stocks
* Russia's corporate governance remains an investor concern
By Alexander Marrow
MOSCOW, Nov 22 (Reuters) - Russian stock indexes have
comfortably outperformed their emerging market peers in 2019 and
with dividend yields high and perceptions of Russian risk
improving, analysts say there is every chance the stock rally
Russia's economic growth has been sluggish since the
imposition of western sanctions in 2014, but the absence of
fresh sanctions, strong oil prices and an improved sovereign
credit rating are attracting investors eager for risk.
The average dividend yield offered by companies listed on
Russia's rouble-based MOEX index surpassed yields on
Russia's sovereign bonds in August. Fixed income investors may
since have started viewing some stocks as "quasi-fixed income
instruments", said Erik DePoy, equity strategist at Gazprombank.
The dividend yield has hovered at around 7% since May,
compared with a yield on Friday of around 6.36% on Russia's
benchmark 10-year OFZ treasury bond.
The bond yield touched an 11-year low of 6.31% after the
Russian central bank cut interest rates last month for the
fourth time this year, lowering the key rate to 6.50%. Bond
yields move inversely to prices.
The MOEX index has fallen away from a record high hit
earlier in November, but analysts believe solid investor demand
means Russian assets can bounce back.
"The cost of the risk premium that investors see in Russia
has faded to levels before sanctions were imposed," said
Iskander Lutsko, head of research at ITI Capital. "The Russian
market has the potential to renew these highs."
Russia's five-year credit default swap price, a gauge of
sovereign risk, closed at an all-time low of $70.43 on Thursday.
Sanjiv Bhatia, founder and CIO of Pembroke Emerging Markets
in London, said his fund was "super excited" about Russia, but
has invested up to 50% less there than it would have due to
Corporate governance also remains a concern, said John-Paul
Smith, of emerging market consultancy Ecstrat, known for
predicting the 1998 Russian crisis.
THE DIVIDEND FACTOR
Strong dividend returns have sent Russian markets soaring in
2019, with gas giant Gazprom, which makes up 10% of
the index, up more than 80% up in dollar terms this year.
"You don't even need other things to do well if that
happens, although other things have done well," said William
Scholes, investment director at Aberdeen Standard Investments.
Gazprom shares jumped after their dividend proposal in June,
responding to pressure from Russia's finance ministry for state
companies to pay at least 50% of net profits in dividends.
Slava Smolyaninov, chief strategist at BCS Global Markets,
said sanctions had helped improve balance sheets because
companies cannot build up excessive debt, thereby freeing up
profits to put towards dividends.
According to Aton Research analysts, "overly generous"
Russian dividend yields are far more lucrative than in other
emerging markets, at around 4 percentage points higher.
Data from flow tracker EPFR showed that Russian stocks were
among the top five gainers for global emerging market equity
funds in 2019, with country allocations to Russia rising 0.45%.
Average weightings for Russia exposure among those funds has
now risen to the highest level since the first quarter of 2014.
The RTS index's 36% gains compare to those of around 8% for
the MSCI Emerging Markets index.
(Reporting by Alexander Marrow; Additional reporting by Karin
Strohecker, Tom Arnold and Marc Jones; Editing by Katya
Golubkova and Catherine Evans)
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