Russian stocks have already had a nice rebound. The VanEck Vectors Russia exchange-traded fund (ticker: RSX) is up 15% this year, outstripping the 12% gain for global emerging markets. Investors expect more to come. “Absolutely,” says David Hauner an emerging markets strategist at Bank of America Merrill Lynch. “Russia will be one of the best-performing markets in bonds and equities.”
Political clouds, and the country’s own snail’s-pace macro growth, have obscured the dynamism of Russia’s corporate sector, adds Jacob Grapengiesser, a partner at Stockholm-based East Capital. He anticipates 18% average profit growth this year for listed companies, even as gross domestic product limps along at about 1.5%. “You have a lot of market consolidation and stores or services that weren’t there before,” he says.
The most dramatic example is Sberbank (SBER.UK), Russia’s state-owned but well-regarded financial flagship. Its shares plummeted by 35% last year on U.S. sanctions jitters. They’ve gained more than half of that back in 2019. But investors still see value, driven by a ruble that’s up 7% against the dollar year to date. “We like the domestic stories,” says Vyacheslav Smolyaninov, chief strategist at Moscow-based broker BCS. “Sber is still a buy for sure.”
The other stand-out consumer-facing company is Yandex (YNDX), which is evolving from Russia’s Google into its Uber, as well, with the mushrooming growth of Yandex Taxi. The company’s earnings before interest, taxes, depreciation, and amortization will leap by 69% this year, Grapengiesser predicts, spelling further gains for the stock despite its 35% rise year to date. A consumer-sector tiger less familiar to global investors is grocery chain X5 Retail Group (Five.UK). BCS sees 30%-plus upside there.
Russian energy producers excite investors less right now. They were not so badly beaten up last year. Their gains from high oil receipts, which are heavily taxed, may be more than offset by the surging ruble, which increases their costs. But Grapengiesser is still keen on No. 2 oil producer Lukoil (LKOD.UK), thanks to aggressive share buybacks that have lifted its effective dividend yield to 13%. The current repurchase program ends on May 1, but he is anticipating renewal.
Ruble sovereign bonds also look attractive, with real yields (interest rate minus inflation) in the 3.5% range. The U.S. Treasury could theoretically still ban purchases of Kremlin paper as punishment for the poisoning of turncoat Russian spy Sergei Skripal in Britain last year. But investors have sloughed off that possibility and returned in near-record numbers to recent auctions.
Russia is still Russia, meaning that its stars may not stay aligned for long. Sanctions on Russian sovereign debt are a centerpiece of legislation creeping steadily through both chambers of the U.S. Congress, notes Elizabeth Rosenberg, director of the energy security program at the Center for a New American Security. “It’s not an urgent priority, but they’ll get there later this year,” she says.
Russia’s President Vladimir Putin could accelerate the process with aggression on fronts from Venezuela, where Russian paramilitaries are helping to prop up dictator Nicolas Maduro, to Ukraine and beyond. But for now, Russian markets are in their best shape in quite a while.
The VanEck Vectors Russia ETF (RSX) was trading at $21.41 per share on Friday afternoon, down $0.08 (-0.37%). Year-to-date, RSX has gained 0.94%, versus a 9.97% rise in the benchmark S&P 500 index during the same period.
