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Equity Yields Highest to Bonds Lure ‘Hot Money’: Russia Credit

The OAO Gazprom Is Seen On A Chimney
The earnings yield of OAO Gazprom, Russia’s gas export monopoly, is 21.5 percent, according to Bloomberg data. Photographer: Andrey Rudakov/Bloomberg

The highest earnings on Russian stocks compared with bond yields are spurring the biggest equity fund inflows in a year on bets rising commodities prices will help extend the best rally among the largest emerging markets.

The 30 stocks in Russia’s Micex Index have an earnings yield, or profits as a proportion of share prices, of 11.1 percent, according to data compiled by Bloomberg. That’s 1.9 times the 5.85 percent yield on Russian corporate dollar bonds, according to JPMorgan Chase & Co.’s EMBI+ index. The average multiple of 2.05 percent since June is the highest for any half-year period since Bloomberg began compiling the data in 2003.

The Micex has gained 22 percent this year, beating indexes in Brazil, India and China, as the biggest energy exporting country benefits from a 26 percent advance in oil in the past four months and investor expectations it will join the World Trade Organization. Investors poured $2.6 billion into Russia stock funds this quarter, the most since 2009 and four times the amount for bonds, according to data compiled by EPFR Global, a Cambridge, Massachusetts-based research company.

“There is a clear shift in Russia money going from bonds towards riskier instruments like stocks,” Mark Rubinstein, head of research at Metropol IFC in Moscow, said in a telephone interview. “Investors see that most blue-chip bonds are yielding 5 percent or even less.”

The yield on dollar bonds sold by Russian companies has fallen 14.5 percentage points since October 2008 from 20.4 percent, according to JPMorgan Chase & Co.’s EMBI+ index. Russia’s average is lower than the 6.21 percent yield for corporate bonds in Brazil, according to the index.

Gazprom, Severstal

The earnings yield of OAO Gazprom, Russia’s gas export monopoly, is 21.5 percent, according to Bloomberg data. The state-owned company’s dollar bonds due in 2015 yielded 4.493 percent yesterday.

OAO Severstal, Russia’s biggest steelmaker, more than doubled on the Micex Stock Exchange this year, the biggest gain on the Moscow-based bourse in 2010. That compares with a 20 percent total return for the Cherepovets-based company’s dollar bonds due in 2013, Bloomberg data show.

“Russia is flavor of the month among emerging market equity strategists,” Brad Durham, a co-founder of EPFR Global, said in emailed comments. “The market is trading at an attractive valuation and the expectation of energy sector outperformance in the coming year is benefiting Russian energy firms.”

The Micex Index jumped 16 percent this quarter, beating a 4.8 percent increase for the MSCI Emerging Markets Index, after underperforming for the first three quarters.

Evraz, Mechel

Evraz Group SA, Russia’s second-largest steelmaker, surged 14 percent in the past month, and OAO Mechel, the country’s largest producer of coal for steelmakers, soared 20 percent as commodities rallied and Russia moved a step closer to membership of the WTO by signing an agreement with the European Union on Dec. 7. Russia’s winning bid to host the 2018 World Cup contributed to the gains as the government prepares to spend $3.8 billion on stadiums and expand airports and roads.

The earnings yield for the Micex is more than double the rate for China’s Shanghai Composite Index and India’s Sensex Index at 5.4 percent and compares with Brazil’s Bovespa Index at 7.3 percent, data compiled by Bloomberg show.

The inflows to equity funds this quarter is the highest since the $2.85 billion received in the last quarter of 2009, and the third-biggest total since the first quarter of 2006 when Russian funds took in $3.8 billion, EPFR data show.

‘Hot Money’

“Speculative hot money” from exchange-traded funds contributed to the inflows, said Chris Weafer, chief strategist at UralSib Financial Corp.

Blackrock Inc., the world’s biggest money manager, opened its iShares MSCI Capped Russian Index fund on Nov. 10. It follows Van Eck Associates Corp.’s Market Vectors Russia ETF set up in April 2007 and SSGA Fund Management Inc.’s SPDR S&P Russia ETF, which began in March 2010.

“ETFs are very momentum-driven and we are seeing a lot flows, especially after iShares launched its fund,” Weafer said in a Dec. 22 phone interview from London. “But ETF money tends to be a lot less stable than mutual funds, which charge higher fees and have longer time-horizons.”

Russia’s dollar bonds due in 2020 rose, pushing the yield 13 basis points lower to 5.01 percent. The extra yield investors demand to hold Russian debt rather than U.S. Treasuries fell 4 basis points to 196 yesterday, according to JPMorgan Chase & Co.’s EMBI+ indexes. The difference compares with 140 for debt of similarly rated Mexico and 179 for Brazil, which is rated two steps lower at Baa3 by Moody’s Investors Service.

Spreads, Swaps

The yield spread on Russian bonds is 43 basis points below the average for emerging markets, the widest gap since Oct. 21, according to JPMorgan.

The cost of protecting Russian debt against non-payment for five years using credit-default swaps fell 2 basis points yesterday to 147, down from this year’s peak of 217, according to data provider CMA. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

Credit-default swaps for Russia, rated Baa1 by Moody’s, its third-lowest investment grade rating, cost 6 basis points more than contracts for Turkey, which is rated four levels lower at Ba2. Russia swaps cost as much as 40 points less on April 20.

The ruble, which is managed by the central bank against a dollar-euro basket to limit swings, was little changed at 30.6100 per dollar in Moscow yesterday, its strongest level since Nov. 11. Non-deliverable forwards, which provide a guide to expectations of currency movements and interest-rate differentials, show the ruble weakening to 30.8500 per dollar in three months.

Slower Growth

While earnings yields are better in Russia, companies in the other so-called BRIC nations benefit from higher rates of economic growth. Russia’s economic expansion at 3.8 percent this year compares with 7.5 percent in Brazil, 9.7 percent in India and 10.5 percent in China, according to forecasts by the International Monetary Fund in Washington.

Russian stocks are outperforming as oil is trading above $90, the highest price in two years. Shares in Russia will gain 10 to 20 percent in 2011, with the market slowing down in the second half of the year as interest rates and inflation climb, Metropol’s Rubinstein said.

“Rotation is definitely happening, with most of the inflows accounting to second and third tier companies because of the better valuations,” Gregory Klumov, chief investment officer at Moscow-based Everest Asset Management, which oversees about $300 million, said in e-mailed comments on Dec. 22.

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