Russian equities now cheaper than ever as rout in crude deepens
By Bloomberg
Russian stocks keep finding new lows. The Micex Index, long one of the world's cheapest benchmarks, is now trading at the biggest discount to emerging- market equities since at least 2005.
The ruble-denominated gauge has lost 7.5 percent this year, compared with a 0.9 percent drop in the MSCI Emerging Markets Index, as sanctions linked to the Ukraine war suppressed Russia's economy. The selloff pushed the Micex's valuation to 4.7 times projected earnings last week, near the cheapest relative to the developing-nation gauge's multiple of 10.7 since at least 2005, data compiled by Bloomberg show.
Investors have pulled money from the world's largest energy-exporting nation as tumbling oil prices and sanctions linked to the Ukraine conflict curb growth. Central bank data show net outflows from Russian assets totaled $75 billion in the first half, compared with $61 billion in all of 2013. The ruble has weakened 19 percent against the dollar this year, the second-worst performance among emerging-market currencies.
"Russia still trades at a discount to emerging markets and the discount is there for a reason," Rahul Chadha, who helps manage about $16 billion in emerging-market equities as co-chief investment officer at Mirae Asset Global Investments, said in an interview at Bloomberg's headquarters in New York yesterday. "You don't know where the floor is, as you don't really know what's on the minds of Russian political leadership while we are in the environment of falling oil and commodity prices."
Sanctions Pinch
Russia's gross domestic product will expand 0.5 percent this year, the weakest since a 2009 contraction, the Economy Ministry forecasts, while the average of 38 economist forecasts compiled by Bloomberg indicates an expansion of 0.3 percent. The slowdown comes after U.S. and its allies imposed sanctions that JPMorgan Chase & Co. and Barclays Plc have forecast will push Russia's $2 trillion economy into a recession next year.
Stocks have tumbled as the U.S. and the European Union imposed measures including financing restrictions and export bans intended to punish Russia for supporting a rebellion in eastern Ukraine. President Vladimir Putin denies involvement in the conflict. While there have been larger stock routs such as during the 1998 default, Bloomberg compiled valuation data only go back to 2005.
The Bloomberg Russia-US Equity Index rose less than 0.1 percent to 73.99 yesterday as the government in Kiev said Russian troops are pulling back from Ukraine's border, easing concern that new sanctions linked to the conflict will further harm Russia's economy. The gauge of the nation's most-traded Russian stocks stocks in New York posted a fifth straight weekly decline in the five days ended Oct. 10, falling 3.8 percent.
'Buying Opportunity'
About 17,600 Russian soldiers, who have been on drills since the summer in the Rostov region near the border with eastern Ukraine, are to be redeployed at their permanent bases, the Kremlin said in an Oct. 11 statement.
The Micex's historical 30-day volatility rose to 21.3 percent yesterday, the highest level since May, and was at 18.5 percent today. Investors have endured wide price swings in Russian stocks as markets react in real time to developments in the Ukraine conflict.
"There's now a buying opportunity in Russian stocks," Ivan Mazalov, a director who helps manage more than $3 billion at Prosperity Capital Management in Moscow, said by phone yesterday. "The valuations are low, the risks have been overpriced, and there are many companies with good revenue growth even as the economy isn't growing."
The discount in Russian equities has been luring some bargain hunters amid signs the Ukraine conflict is easing. The Market Vectors Russia ETF rallied 0.9 percent to $21.45 yesterday. Investors poured about $74 million into the largest U.S. exchange-traded fund focused on the nation's equities in the five days through Oct. 10 for a 10th straight week of inflows, the longest positive streak since 2008, according to data compiled by Bloomberg.
Mechel, Gazprom
OAO Mechel, the miner seeking to avert bankruptcy, led gains on the gauge of U.S.-traded Russian stocks yesterday, rallying 11 percent to 78 cents after VTB Group's chief executive officer said he still sees a chance that an agreement to refinance the company's $8.7 billion debt will be reached. Natural-gas exporter OAO Gazprom gained 1.1 percent to $6.72. Wireless phone company VimpelCom Ltd. advanced 1.4 percent to $5.80 for the biggest gain since Sept. 4.
"The market got smashed down for absurd reasons so reality is now setting in to the value there," Jim Rogers, who set up Quantum Fund with George Soros in the 1970s, said by e-mail from Singapore yesterday.
Oil Prices
Rogers, who said he has been bearish on the former Soviet nation for most of the time he's been investing, said Oct. 1 that he has bought Russian ETFs and local stocks, including OAO Aeroflot, the nation's biggest airline, and OAO Moscow Exchange.
The dollar-denominated RTS Index has tumbled 25 percent this year, the second-worst performance among the world's primary equity gauges. Brent crude slid to the lowest in almost four years yesterday after Iraq followed Saudi Arabia and Iran in cutting prices. Oil and natural gas account for about half of Russia's budget revenue.
Futures contracts on the dollar-denominated RTS index expiring in December fell 0.6 percent to 106,420 in U.S. hours yesterday. The RTS Volatility Index, which measures expected swings in the stock futures, rose 1 percent to 31.86. The Micex was up 0.5 percent at 1,390.98 by 10:45 a.m. today.
"Putin-backed forces are still causing trouble in Ukraine," Steven Schoenfeld, founder and chief investment officer at Blue Star Global Investors LLC, said in an interview at Bloomberg's headquarters in New York yesterday. "In the environment of a falling oil price, weakening ruble and slowing growth, Russia may remain an unattractive investment, despite low valuation, given the geopolitical risk involved."