Russia is now the largest overweight position in the average emerging-market fund, which holds 1.46% more Russian stocks in its portfolio than the benchmark MSCI Emerging Markets index. With stocks in the country remaining remarkably cheap despite offering some of the most attractive dividend yields in the developing world, Russia’s market is fast becoming an increasingly pivotal part of any savvy emerging market investors’ portfolio.
Rising oil prices, a drop in inflation, and strong GDP growth have helped Russia to emerge from a recent recession with better economic prospects than it has seen since before the global financial crisis.
The nation is throwing more weight behind structural reform. A particularly interesting development came in April, when its government demanded that state-owned companies pay out half of their profit in dividends this year. Although the move was chiefly driven by a need to cover the federal budget, it also came as a boon to private investors in affected companies. Perhaps coincidentally, the move falls in line with a general trend of increasing Russian dividend payouts in recent years. Since 2014, dividends on a $100 dollar investment have risen from around $2.5 to $3-4, making the country one of the most lucrative hunting grounds in the world for income investors.
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With the help of stabilising crude oil prices, which have returned to more than $50-a-barrel since the recession, Russia’s GDP growth has also bounced firmly back into positive territory in 2017.
Indeed, in the second quarter it hit 2.5pc, its fastest rate in nearly five years. Russia’s government remains confident that GDP growth will come in at least 2pc for the whole of 2017 before extending to 2.5pc next year.
Its stock market – the RTS – was among the top emerging market performers last year, delivering impressive dollar returns of 50pc.
It has continued to rise in 2017. But with markets failing to account for these economic improvements in their valuation of the country’s markets, shares remain highly discounted.
The economist, Robert Shiller recently claimed that Russia has one of the lowest price-to-earnings ratios in the world, at around half that of its emerging market peers.
There has been a general trend of increasing Russian dividend payouts in recent years. Since 2014, dividends on a $100 dollar investment have risen from around $2.5 to $3-4, making the country one of the most lucrative hunting grounds in the world for income investors.
We’re not expecting any surprises from the ruble exchange rate, with the ruble-U.S. dollar exchange rate finding its equilibrium at 60 rubles.
Some analysts think the Russian currency might actually strengthen. Petr Pushkarev, chief analyst at TeleTrade, believes the dollar exchange rate could reach 53-55 rubles, which would make ruble investments more profitable.
ITI Capital has expanded its business with the launch of ITI Funds, a European ETF platform. It will focus on developing a range of emerging market focused UCITS ETFs. There are currently two Russia-focused ETFs covering top quality equity and USD debt segments of the Russian financial market.
For further information please visit the ITI Funds website.