Russian corporate bonds are trading at the most expensive level compared with stocks since January 2009, just before the Micex equity index began its biggest rally in a decade.
Company debt returned 136 percent since bottoming in October 2008 in the global financial crisis, the most in emerging markets after Kazakhstan, according to JPMorgan Chase & Co. The rally pushed down the yield on JPMorgan’s Corporate EMBI Russia Index to 7.1 percent versus a 12 percent yield on profits of Micex companies, according to data compiled by Bloomberg.
The last time Russian earnings topped bond yields by such a margin, the stock index jumped 79 percent in four months. Similar gaps in January 2008 and June 2005 also preceded equity rallies. While the Micex is down 13 percent from its 2010 high on concern Europe’s debt crisis will damage the global recovery, analysts are forecasting a 43 percent increase in Russian company earnings spurred by economic growth that Goldman Sachs Group Inc. says will reach 5.8 percent this year.
“Low bond yields reflect the fact that corporate earnings are strong and default risks are perceived to be much lower than they were,” Liam Halligan, the chief economist at Prosperity Capital Management in London, which oversees about $4.2 billion in Russia and the CIS region, said in an interview. “Given that, Russian equity does seem undervalued.”
OAO Gazprom, Russia’s state-controlled gas producer, has an estimated earnings yield, or income relative to its share price, of 21 percent while its dollar bonds due April 2019 are returning 7.3 percent, according to data compiled by Bloomberg.
OAO Severstal, the nation’s largest steelmaker, will yield 10 percent in profits this year, based on nine analyst forecasts on Bloomberg, while its U.S. currency debt due July 2013 has a payout of 7.3 percent. Shares of OAO Sberbank, Russia’s largest lender, yield an estimated 9.5 percent in earnings, compared with the 4.7 percent on its dollar notes due July 2013.
The Micex index advanced 2.6 percent today for the biggest gain among benchmark gauges in the world’s 50 biggest markets. Gazprom shares rose 2.1 percent, Severstal climbed 3.8 percent and Sberbank jumped 5.1 percent.
“Given the significant fall in Russian bond yields over the past 18 months, Russian stocks may provide a more attractive opportunity for those who believe that Russia will emerge strongly from the current market weakness,” Hans-Joerg Rudloff, the chairman of Barclays Capital, who pioneered the Eurobond market in the 1980s, said in an e-mail to Bloomberg News.
Russian equities had lower valuations than in China, India and Brazil on average in the past three years after disputes between the government of Prime Minister Vladimir Putin and companies from steelmaker OAO Mechel to OAO Yukos Oil Co.
The Micex tumbled 23 percent in July and August of 2008 as Putin accused Moscow-based Mechel of price fixing and Russia waged a five-day war with Georgia. Yukos of Moscow, once Russia’s largest oil producer, was bankrupted during Putin’s presidency in 2006 after the government claimed more than $30 billion in back taxes.
Europe’s debt crisis is increasing the risk of a downturn in the global economy and lower prices for oil, Russia’s biggest export, according to Eric Kraus of Otkritie Financial Co. Kraus favors corporate bonds over equities because stocks are more vulnerable to a decline in investor appetite for higher-yielding assets.
“Global growth is going to be something between soft and disastrous” Kraus, Otkritie’s Moscow-based strategist, said in an interview on June 8. “You currently get well-paid for holding Russian corporate bonds.”
Falling stock prices in Russia and eastern European countries from Hungary to Romania have created buying opportunities, according to Templeton Asset Management Ltd.’s Mark Mobius. Hungary’s BUX index has lost 16 percent from this year’s peak, while Romania’s gauge is down 23 percent.
“Russia has not been impacted so much” by the European debt crisis, Mobius, who oversees about $34 billion in emerging markets as Templeton Asset Management’s Singapore-based chairman, said in a Bloomberg Television interview last week.
Russia’s jobless rate declined to 8.2 percent in April, the lowest level in four months, and annual real wage growth accelerated to 6 percent, the most since October 2008, the statistics service said last month. The economy expanded 2.9 percent in the first quarter from a year earlier after shrinking 3.8 percent in the fourth quarter, the service said June 11.
Russian earnings will increase at almost twice the 22 percent projected rate in Brazil in the next 12 months, and surpass the 6.5 percent gain in India and 30 percent growth in China, according to estimates compiled by Bloomberg.
“Russia has always appeared cheap relative to other emerging markets but at the moment it’s very cheap,” Gareth Morgan, a London-based money manager at F&C Asset Management, which oversees more than $147 billion worldwide, said in an interview. If the global economic expansion continues, “Russia is attractive,” he said.
The Micex has the highest earnings yield among the largest emerging nations, or so-called BRIC markets, and it’s almost double the 6.1 percent yield on the Standard & Poor’s 500 Index, the benchmark measure for U.S. equity.
‘Strengths of Russia’
Gazprom’s earnings are poised to climb 6.4 percent this year and shares of the Moscow-based company may rally 67 percent in the next 12 months, according to the average of at least nine analysts’ estimates compiled by Bloomberg. Severstal shares may gain 68 percent as the company, based in Cherepovets, in Russia’s Vologodsky region, returns to profit this year after a loss and boosts earnings by 42 percent in 2011, based on the average estimate of five forecasts compiled by Bloomberg.
Net income at Moscow-based Sberbank will increase about 12- fold from 2009 to 2011 and the stock has the equivalent of a “buy” rating from 23 analysts, compared with four “holds” and one “sell,” data compiled by Bloomberg show.
“In the past we’ve beat the drum more on the debt side, but there’s quite an attractive risk-reward now in buying equities,” Troika Dialog’s Kingsmill Bond, who was voted the top Russian strategist in last year’s Thomson Extel survey, said in an interview in London.
“When the global economy stabilizes, the strengths of Russia will come to the fore and the market is quite cheap,” Bond said, citing Russia’s higher earnings growth prospects, lower debt levels and smaller government budget deficit.
Russia’s sovereign debt as a percentage of gross domestic product is likely to reach 7.7 percent this year, near 2007 levels, while the ratio in the U.S. will surge to 93.6 percent in 2010 from 61.9 percent in 2007, the Washington-based International Monetary Fund forecast in November. Russia’s budget deficit in 2010 will probably amount to 5.4 percent of GDP, less than an earlier 6.8 percent estimate, the government said in a June 10 report.
“We are very much at the low end of historical valuations” in Russia and global developing-nation equities, Jonathan Garner, the chief Asia and emerging-market strategist at Morgan Stanley in London, said in an interview. He advised investors on May 26 to increase holdings of emerging-market stocks including Russia, where he has an “overweight” recommendation.
“We’ve had a very rapid correction in equities,” he said. “As the earnings growth keeps coming through, it has opened up a very interesting buying opportunity.”