Among global investors, one thing that Russian stocks are
known are a tendency to trade at valuations that are low compared
to the broader emerging markets universe. However, Russia's
inexpensive equities were not enough to prevent JP Morgan from
downgrading the "R" in the famous BRIC acronym from Neutral to
In a report dated April 20, Adrian Mowat, JP Morgan's chief
Asia and emerging-market strategist said Russia is vulnerable to
. A recent dividend cut announcement by Russian energy OAO
) is not helping matters, either.
The Gazprom news comes after the largest Russian company by
market value announced in February that it reduced its 2012
dividend to seven to eight rubles per share, down from the payout
of 8.97 rubles in 2011. However, at the time Gazprom
said its 2013 payout could jump to eight to nine
. Instead, the company suggested a 33 percent cut earlier this
The Gazprom dividend cut and JP Morgan downgrades are two
issues that have the potential to weigh on Russia
and that is saying something. In a year when the largest emerging
have been dreadful in terms of returns
, Russia has been a particularly egregious offender.
Year-to-date, the Market Vectors Russia ETF (NYSE:
), the oldest Russia ETF, is down 13.8 percent. That makes RSX by
far the worst performer among the four major BRIC ETFs with a
loss that is nearly 300 basis points worse than the iShares FTSE
China 25 Index Fund (NYSE:
). RSX's decline is more than two-and-half times worse than the
5.1 percent year-to-date loss seen on the Vanguard FTSE Emerging
Markets ETF (NYSE:
), the largest emerging markets ETF by assets.
Declines for Russian equities and the corresponding ETFs
indicate investors are not taking the bait on the market's
stunningly low valuations. The MSCI Russia Index trades at 4.9
times its estimated 12-month earnings compared to 10 times for
the MSCI Emerging Markets Index, according to Bloomberg.
In fact, Russian equities are deeply discounted relative to
their historical standards. The average P/E ratio on the MSCI
Russia Index over
the past decade is almost nine
At the ETF level, RSX ended March with a P/E below 6.5 and a
price-to-book ratio just over one. The iShares MSCI Russia Capped
Index Fund (NYSE:
) trades for 8.24 times earnings with a 1.76 price-to-book ratio,
according to iShares data
Another way of looking at the near-term scenario for Russian
equities is that if investors have not been lured in by cheap
valuations, then a dividend cut by Gazprom is not going to do the
trick. Actually, Gazprom's dividend reduction poses a risk to
Russian stocks on multiple stocks.
First, it flies in the face of the Russian government's
efforts to force state-run enterprises there to boost their
payouts in a bid to attract more foreign investors. Russian firms
are highly profitable and prodigious generators of free cash
compared to their equivalents in other emerging markets, but the
Gazprom dividend news could dent the country's allure as a
Second, Gazprom is a major holding in Russia ETFs. The shares
represent more than 18 percent of the weight in the iShares MSCI
Russia Capped Index Fund. Gazprom is RSX's second-largest holding
with an allocation of 8.2 percent.
Cheap or not, investors may have more reasons to avoid Russian
stocks in the near-term than they have to embrace this volatile
For more on ETFs, click
(c) 2013 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
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