Russia's dividend yields quell sanctions fears as stocks break records

By Alexander Marrow

MOSCOW (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 can continue.

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 (IMOEX) 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 (RU10YT=RR).

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.

(GRAPHIC: Dividend yield versus bond yield - https://fingfx.thomsonreuters.com/gfx/editorcharts/RUSSIA-STOCKS-YIELDS/0H001QXL59KG/eikon.png )

DECLINING RISK

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 sanctions risk.

Corporate governance also remains a concern, said John-Paul Smith, of emerging market consultancy Ecstrat, known for predicting the 1998 Russian crisis.

(GRAPHIC: Russia stocks - https://fingfx.thomsonreuters.com/gfx/mkt/12/9068/8980/Russia%20stocks.png )

THE DIVIDEND FACTOR

Strong dividend returns have sent Russian markets soaring in 2019, with gas giant Gazprom (MM:GAZP), 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.

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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 toward 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 .