Russia is the world’s best performing stock market in 2019, up almost 40% on the RTX index for US dollar investors. Russian equities issuance is shrinking due to corporate buybacks and low IPO’s/secondary issuance. 2019 was the year of living dangerously in Moscow’s bourse and demi monde. This is ironic given that geopolitical headline risks in Putin’s Russia have been as murky in 2019 as at anytime in his past two decades as President.
I have been bullish on Russian equities for multiple reasons in 2019.
One, Russia is the ultimate value Cinderella in emerging markets as, despite its stellar performance in 2019, Moscow’s dollar denominated RTX index still trades at 6.7 times earnings and offers a 6.4% dividend yield. In contrast, the S&P 500 index trades at 19.6 times operating earnings and cannot even manage 1.8% dividend yield.
Two, while I am horrified by the reckless leverage and debt accumulation in Argentina, Lebanon, Pakistan, Sri Lanka, Zambia, certain GCC economies and dozens of emerging markets, Putin’s Russia is a model of fiscal rectitude with a debt/GDP ratio of a mere 20%. Russia is the most underleveraged emerging markets on the planet at a time I am convinced the trillion dollar daisy chains of sovereign debt chickens will come home to roost in 2020.
After all, China’s debt to GDP ratio is estimated at a shocking 300%, Brazil is at an iffy but manageable 80% and Uncle Sam at a scary 100% of GDP once Trump’s tax cuts and higher defense spending come into full effect. The Russian consumer, with household debt of only 14% of GDP is one of the world’s great growth magnets of the next decade.
Three, I believe that the secret history of global finance is written in real time in the $5 trillion a day global currency market, the ultimate game of three-dimensional chess. The Russian rouble is the best performing currency against King Dollar in 2019, up 16%.
Four, Russia’s financial renaissance since 2014 is a testament to the brilliance of Bank Russiya Tartar governor Elvira Nabiullina, who has nurtured the economy with strategic rate cuts and subtle management of the money/capital markets. Since I believe gold prices will rise to $1650 an ounce in 2020, I am bullish on the Russian rouble as the world’s de facto gold backed currency. The World Gold Council estimates that Russia is now the world’s largest sovereign owner of gold with central bank bullion reserves at 2250 tonne. Obviously, the gnomes, punters and cognoscenti of Planet Forex believe the Russian rouble is still one of the safest, most undervalued emerging markets currencies in the world. My take? Da da da (yes in Russian)!
Five, Russia has now established a strategic relationship with Saudi Arabia and the UAE that transcends discussions on oil prices. The king and crown prince of Saudi Arabia have made state visits to Moscow, as has the crown prince of Abu Dhabi. In the wider Middle East, Russia has strategic relationships with Syria, Turkey, Egypt, Israel and Iran, taking advantage of the “East of Suez” like disengagement from the region by Uncle Sam under Presidents Obama and Trump. My analysis of Gulf sovereign wealth fund capital flows suggest a dramatic increase in allocations to Russian equities since 2016, a crucial ballast for the 2019 fairy tale in Moscow.
Six, as the dramatic fall in yields on sovereign Eurobonds issued by the Russian Federation and state owned gas colossus Gazprom suggests, global perceptions of Russia’s “country risk” have fallen since 2018. This is a steroid shot for a stock market where dividend yields are still near historic highs. At a time when $15 trillion of government debt in Europe and Japan offers negative interest rates, the high carry in Russian rouble denominated government bonds is a compelling yield magnet for global investors.
Seven, I was a Russophile ever since I fell in love with Gogol, Pushkin, Dostoevsky, Tolstoy and Pasternak as a teenager.
Churchill’s view of Russia as “a riddle, wrapped in a mystery, inside an enigma,” makes total sense to me when I traveled to Moscow and St. Petersburg a decade ago in a (futile) quest for gas deals with minor/ex oligarchs just before the 2008 war with Georgia. Russia is a land haunted by its tragic but magnificent past, its ancient phobias and its limitless landscapes. I cannot fathom the Russian soul, except in literature, ballet and the ghosts of Fontanka/Moika but I definitely understand the compelling value of Russian equities at 6 forward earnings at a time when an acceleration in global growth will mean higher allocations to emerging markets equities.
Eight, Russia is actually a beneficiary of the escalation of the US-China trade and technology war as both Washington and Beijing woo the Kremlin to gain leverage in the global balance of power. The US and Germany will not impose new sanctions on Russia even as China’s central bank buys roubles, invests in Siberian infrastructure and fast tracks lucrative LNG deals with Gazprom. This is one reason Wall Street hedge funds have scrambled to Moscow in 2019.
Nine, the Russian government has ordered its biggest state owned companies, led by Sberbank (a bank founded in the reign of Tsar Alexander II in 1861 that now controls a third of Russian loans and deposits, the Kremlin’s ultimate “too big to fail bank”) and Gazprom (owner of 20% proven global gas reserves) have both increased dividend payout ratio to almost 50% under pressure from the Kremlin. Sistema surged 90% in 2019 for precisely the same reason. The smart money knows which Russian companies will be the next to boost payout ratios in 2020.
The Russian equity risk premium is among the highest in the world, a persuasive argument to buy Russian equities in 2019. It is no surprise that Sistema, Gazprom and Surgutneftegas, all Kremlin crown jewels rose 70 – 90% in 2019. Spasiba bolshoi, tovarich Putin! For me, the signal to buy Russian equities was when Kremlin pressured Gazprom to boost its dividend payout ratio to 50% in early 2019.
Ten, Russian earnings estimates have been consistently increased by sell side brokers in 2018. As global growth accelerates, high beta energy/metal stocks in Moscow will outperform their global peers. In fact, I would even buy the Russian rouble against the Canadian dollar as a relative value petro FX trade.
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