Hermes: Consider Russia for Income But Not Long Term Growth

Russia stock market is up 35% year to date thanks to the recovery of oil price, however investors should consider Russia equities for income but not for long term growth

Karen Kwok 26 October, 2016 | 5:05PM

Russia stocks offer attractive dividends that could be a sustainable source of income for UK investors, according to Gary Greenberg, head of emerging markets for Hermes. However, investors looking for growth should steer clear, as the market offers low profitability and capital could be at risk.

“It is appropriate and sensible for Russia companies to pay high dividends as they do not have particular great capital expenditure projects,” Greenberg told Morningstar this week. “But I do not have an overweight position in Russia because it remains too government controlled, and there is always potential for war in the region.”

Hugo Bain, senior investment manager at Pictet Asset Management said that dividend yields of Russian stocks are extremely attractive relative to the US market. While the Moscow Exchange MICEX index offers a dividend yield of 5.8%, S&P 500 offers just 2%.

Oleg Biryulyov, manager of the Bronze Rated JPMorgan Russia fund echoes Greenberg’s views, saying that he saw an encouraging trend with regards to the sustainability of pay-out ratios in Russia equities.

“The aggregate pay-out ratio for the Russian equity market is still below 50% today, but it was below 20% just three years ago. So there is a clear positive trend,” said Biryulyov.

“We also see that the Russian government has pressed state-controlled companies to increase pay-outs. Investors in Rosneft (ROSN) and Gazprom have therefore been the major beneficiaries of this move.”

Despite oil production at historic highs and the Russian government raising corporate taxes for the energy and mining sectors, these stocks are doing well – reaping the rewards of the depreciation of Russian currency, the ruble. As a result, Bain thinks energy and mining companies should still have plenty of cash leftover to pay attractive dividends.

Will Russia Stock Market Rally Last?

The Russian stock market is up nearly 35% since the start of the year in both US dollar and local currency terms. As the Russia economy is heavily dependent on oil and other natural resource exports, the rebound in commodity prices this year has benefited the Russia economy. Although this year was preceded by two years of poor performance, investors should consider whether they have missed the bulk of the rally.

Greenberg expects the Russian economy to continue to recover next year, pulling itself further out of the recent recession – and for stock market gains to continue too.

“In the short term, the outlook for Russia is positive thanks to a recovery in the oil price,” he said.

“The investment on oil production has lagged a lot in the last couple of years. It’s entirely possible for the oil price to go up to $65 per barrel in the short term.”

Oil price prices sit at $49 currently, but have been as low as $24 in February.

Bain agreed, saying that as long as oil stays above $40 a barrel, any economic growth in Russia should benefit Russian equities.

What About Geopolitical Risks?

Geopolitical risks in the region abound. Global investors and politicians alike hoped that Russia would become more cooperative politically in international affairs in exchange for other nations lifting sanctions on Russia. But recent activity suggests this will not be an easy negotiation.

“Why do they care about Syria? It gives them absolutely nothing,” said Greenberg. “So they could say in return for pulling out and being collaborative about Syria, the US might agree to life sanctions. This could end up a win-win and Russia economy could then recover. This could be entirely possible.”

But that solution might not be possible if the Democratic presidential candidate Hilary Clinton is elected to be the US President in November, as Clinton less amenable than Donald Trump in her attitude towards Russia, Greenberg added.

Rob Drijkoningen, co-manager of the Silver Rated Neuberger Berman Emerging Market Debt Hard Currency fund pitched in, saying “It is unlikely sanctions will be lifted in the near term, especially when Clinton is in charge.”

However Biryulyov does not believe the outcome of the US election will be a major factor in the performance of the Russian equity market over the next two years.

“Very few Russian companies have significant presence of investments in the US, as such the outcome will be neutral. Domestically, post the parliamentary elections which were largely a non-event, Russian politics are likely to be more predictable for the 24 months, and global perception is unlikely to get much worse from current very low levels,” said Biryulyov.

Russia is High Risk Investing

Biryulyov reminds investors that Russia remains a high risk, high return asset class as it is volatile and cyclical, due in large part to the high representation by cyclical commodity sectors.

“The market is still down -14.7% over the last five years. However, it is up 8.1% over the past ten years, and 12-fold since 1994. For long-term investors, patience has been rewarded,” Biryulyov said.

However, looking forward, Greenberg cast doubts on the future growth of Russian economy, and indeed stock market returns, as Russia seems to be falling behind of technology development to compete with the rest of the world. 

“There will be some positives sanctions are lifted, but so what? Russia’s policies are not focused on competition, improving quality of education or opening up economy for idea investment. Therefore in today’s hyper competitive connective digital world, Russia is falling behind quickly. It has little hope of catching up because in essence they are not even trying,” said Greenberg.

Drijkoningen added that that if Russia remained disengaged with the international world, the impact of technology improvement in Russia would probably be limited as the country would be constrained by the international players.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Gazprom PJSC  -
Hermes Global Emerging Mkts R EUR Acc4.20 EUR1.06
JPM Russia C (acc) USD5.48 USD-0.91
Neuberger Berman EM Dbt Hard Ccy A € Acc11.44 EUR-0.29
Pictet - Emerging Europe R EUR302.25 EUR0.11
Rosneft Oil Co GDR6.00 USD-1.54-
About Author Karen Kwok

Karen Kwok  is a Reporter for