JPMorgan Chase & Co. advised reducing Russian stock holdings as OAO Gazprom (GAZP)’s proposed dividend cut, falling oil prices and “policy stasis” in President Vladimir Putin’s government overshadow low valuations.
Russia was cut to underweight from neutral, Adrian Mowat, JPMorgan’s chief Asia and emerging-market strategist, wrote in a report dated April 20. The nation’s stock market, the biggest consensus overweight position among emerging-market fund managers, is vulnerable to foreign outflows, Mowat said.
State-run Gazprom, Russia’s largest company by market value and the stock with the biggest weighting in the MSCI Russia (MXRU) Index, proposed this month reducing its annual dividend by about 33 percent. Mowat said the cut removes the “last and best bull point” for the stock, which tumbled to the lowest level since March 2009 in Moscow trading on April 19. Russia, which depends on oil and gas for about half of government revenue, has made little progress in curbing its budget deficit or improving the nation’s pension system, the strategist said.
“Investors point to low valuations on Russian stocks as a bull case, but they cannot really answer our questions about what improvements they have seen recently in the policy environment or the expectations of future improvements,” Mowat wrote.
The MSCI Russia Index has tumbled 11 percent this year and reached the lowest level since July on April 17. The gauge is valued at 4.9 times estimated 12-month earnings, versus 10 times for the MSCI Emerging Markets Index (MXEF), according to data compiled by Bloomberg. Gazprom, Russia’s natural-gas export monopoly, trades for 2.7 times projected 2013 profits after the stock retreated 16 percent this year.
Brent crude futures gained 0.3 percent today, rising for a third day from the lowest close since July. Prices have fallen 9.1 percent this month amid concern a slowing global economy will hurt fuel demand.
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