Russia’s Low Equity Prices Spurring Interest

equity
gannatti
Head of Research, Europe
03/13/2013

Jim Rogers, a well-known investor with particular acumen for commodity and natural resource investing, said in a recent CNBC interview, “For the first time in 46 years I am buying Russia.”1 His reasoning: Russia currently produces about 10 million barrels of oil per day out of about 90 million produced globally, and it also produces 2 billion cubic feet of natural gas daily.2 If appetite for these resources in emerging markets remains strong, it is not difficult to see the potential for Russia’s equity markets to benefit. Performance of Russian Stocks For the 12-month period ended January 31, 2013, the MSCI Emerging Markets Index was up approximately 8%. Within emerging markets, many consider Brazil, Russia, India and China—the so-called “BRIC” countries—important barometers of the asset class. The MSCI China Index has been the leader of late, up about 15.7% over the period, whereas the MSCI Brazil Index has been the laggard, down about 10.4%. The MSCI Russia Index, up about 6% over the period, has been in the middle of the pack3. What is currently attracting attention to Russia are the relatively modest valuations in these stocks—low single-digit price-to-earnings (P/E) ratios —unique among equities in both developed and emerging markets today.   Russia: The Valuation Outlier among the BRIC Countries (For definitions of Indexes in this chart, please see our Glossary.)   Russia’s equities are not just inexpensive compared to other markets, they’re also inexpensive compared to their own history. The average P/E ratio of the MSCI Russia Index over last 10 years (as of January 31, 2013) is approximately 8.9x, or nearly twice current levels. The 800-Pound Gorilla: Gazprom Russia certainly is a country with unique risks—many in the political realm. It also has unique concentration in some of the largest firms, which tend to operate in the oil and gas resource space. Gazprom, the largest dividend payer within Russia’s equity markets4, delivered an approximately -17% return and was a particularly poor performer over the 12 months ending January 31, 2013. Whether one weights Russia’s equities by cash dividends or by market capitalization, Gazprom represents a significant exposure. The firm has recently been under pressure due to earnings declines and potential dividend cuts, but if Russia’s markets rebound, it is difficult to see how Gazprom would not see a potential benefit. The firm is a veritable monopoly within Russia’s oil and natural gas industries, and it is approximately 50% owned by the Russian government5.   • As of the May 31, 2012, WisdomTree Index screening, Gazprom was the second-largest dividend payer in emerging markets, with $6.34 billion. The next largest, Vale S.A., was at $2.97 billion. • From May 31, 2011, to May 31, 2012, Gazprom grew its dividends per share by nearly 95% and saw its trailing 12-month dividend yield go from less than 2% to over 6%. It is difficult, if not impossible, to imagine it continuing this rate of growth. • While dividend cuts are tough to see in a positive light, as of January 31, 2013, Gazprom was trading at a trailing 12-month dividend yield almost 2.5 times that of the broader MSCI Emerging Markets Index, with a P/E ratio that was less than 40% of that of the same index.   While we would agree that the price performance of Gazprom’s shares could be in for some near-term volatility, we believe that the current valuation relative to the broader emerging markets might start to point to an opportunity.   WisdomTree Emerging Markets Equity Income Index (WTEMHY): Went Over-Weight Russia for First Time since Its Inception Last Year Based on the 5/31/2012 Index Screening   Historically, the WTEMHY had very little exposure to Russia, given the fact that few Russian companies passed its strict requirements regarding the trailing 12-month dividend yield. Then, at last year’s Index screening on May 31, 2012, a number of the big Russian energy companies qualified due to their positive dividend growth and poor stock price performance. Russian equities became a 13.46% weight—a gain in weight of more than 12%. Performance thus far has been mixed for the Russian companies added at the last annual rebalance: Gazprom has been weak, but the second-biggest Russian company added, Lukoil, has been quite positive. The WTEMHY identified a valuation opportunity in Russia, just as Jim Rogers is getting interested in Russia because of the low prices of many Russian equities. Why a Diversifed Basket Investing in single countries involves being concentrated in risks specific to that country. This is why many people use diversified baskets such as the one represented by the WTEMHY, which tries to identify other valuation opportunities (such as the aforementioned Russia example) across multiple countries. Put simply, as of January 31, 2013, more than 86% of the Index’s weight was in constituents outside Russia—even though Russia is over-weight compared to traditional market cap-weighted indexes.   For current holdings in the WisdomTree Emerging Markets Equity Income Index (WTEMHY) click here.   Data sources are WisdomTree & Bloomberg unless otherwise stated.   1Justin Menza, “Short US Government Bonds ‘Right Now’: Jim Rogers,” CNBC, 2/7/2013. 2Roger Nusbaum, “Jim Rogers Is Buying Russia; Should You, Too?” The Street, 2/11/2013. 3Source: Bloomberg 4Source: Standard & Poor’s, as of WisdomTree’s most recent Global Index screening date, 5/31/2012. 5http://www.gazprom.com/investors/stock/, as of 12/31/2011 (most recent report).

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About the Contributor
gannatti
Head of Research, Europe

Christopher Gannatti began at WisdomTree as a Research Analyst in December 2010, working directly with Jeremy Schwartz, CFA®, Director of Research. In January of 2014, he was promoted to Associate Director of Research where he was responsible to lead different groups of analysts and strategists within the broader Research team at WisdomTree. In February of 2018, Christopher was promoted to Head of Research, Europe, where he will be based out of WisdomTree’s London office and will be responsible for the full WisdomTree research effort within the European market, as well as supporting the UCITs platform globally. Christopher came to WisdomTree from Lord Abbett, where he worked for four and a half years as a Regional Consultant. He received his MBA in Quantitative Finance, Accounting, and Economics from NYU’s Stern School of Business in 2010, and he received his bachelor’s degree from Colgate University in Economics in 2006. Christopher is a holder of the Chartered Financial Analyst designation.