Corporate profits in Russia are near the lowest levels since the global financial crisis. Yet analysts are more bullish on the country’s equities than they are for the other BRIC nations -- Brazil, India and China.
That deviation could be a signal that the nascent rebound is just the beginning of a rally in the cheapest equity market in the developing world. The Micex Index will return 17 percent over the next 12 months, the most among the BRICs, according to analysts surveyed by Bloomberg. The projections come as quarterly reports show the lowest average earnings per share since the beginning of 2009.
While the economy is still forecast to shrink about 4 percent, stocks have rebounded 19 percent in Moscow this year, while the ruble gained 13 percent after a 46 percent drop in 2014. Sanctions linked to the Ukraine conflict and plunging oil prices have spurred capital flight. The Micex trades at six times projected earnings, compared with 12 times for the MSCI Emerging Markets Index. Stock prices probably already reflect the worst possible scenarios, according to Otkritie Asset Management.
“The Russian market’s low valuations already take into account all the negative factors including the economic decline, oil prices and political risks,” Sergey Vakhrameev, a money manager at GL Financial Group, said by phone from Zurich on Friday. “The worst seems to be behind us.”
The financial crisis has squelched earnings at some of the biggest companies in the Micex. OAO Lukoil, the nation’s second-biggest oil producer, said profit fell 39 percent in 2014 as crude prices slumped. OAO Gazprom, the state-controlled natural gas producer, report third-quarter profit that dropped 62 percent as sales slid on declining demand in Europe and Ukraine.
VTB Group, the nation’s second-biggest lender, said profit plunged 96 percent on soaring provisions as the ruble collapsed. OAO Mobile TeleSystems, Russia’s largest mobile-phone carrier, reported a 92 percent drop in fourth-quarter net income.
Analysts expect Brazil’s Ibovespa and India’s S&P BSE Sensex to return 11 percent over the next 12 months, estimates compiled by Bloomberg show. The Shanghai Composite Index is projected to slide 4.8 percent.
The MSCI Emerging Markets Index trades at the highest premium on a price-to-book basis compared to the Micex since 2007, according to data compiled by Bloomberg. The developing-nation benchmark is valued at a multiple of 1.6 by that measure, compared with 0.5 for the Moscow gauge.
The potential for Russian stocks to rally is “nowhere near” as large as the valuation discount versus emerging markets as an “unimpressive” history of earnings growth and corporate governance impede growth, Citigroup Inc. said in an e-mailed research note on April 7.
“That said, we are almost certain that Russia will eventually return as a destination for investors, and when this happens, sharp upward moves could be seen given the market’s extreme value and under-owned status,” Citigroup analysts led by Richard Schellbach said in the note.
Russia’s capital outflows more than halved in the first quarter from the previous three months to $32.6 billion from January through March, the 23rd consecutive negative quarter, according to initial estimates published by the central bank last week. Gross domestic product unexpectedly expanded 0.4 percent from a year earlier, the Federal Statistics Service in Moscow said on April 1.
The Market Vectors Russia ETF fell 3.7 percent on Friday to $18.81, trimming its weekly gain to 2.2 percent. Inflows into the biggest exchange-traded fund investing in the country’s stocks reached $64 million last week through April 9, poised for the biggest weekly inflow since the week ended Feb. 27, according to data compiled by Bloomberg.
The Micex climbed 1.9 percent to 1,687.96 by 1:53 p.m. in Moscow today, while the ruble strengthened 2 percent to 52.555 against the dollar.
“If the pessimistic expectations, which are reflected in the stock prices, turn out to be even just a little bit different from reality, we may see a decent rally,” Vitaly Isakov, a money manager at Otkritie Asset Management in Moscow, said by e-mail on March 31. “The recession will end and stocks bought at the lowest valuation in one or two years have all chances of outperforming.”