Russia boasts a fiscal surplus, a current account surplus, low inflation, single digit unemployment, improving governance and a central bank in the midst of a rate cutting cycle, but still remains undervalued, trading at 0.8x price-to-book, 6x price-to-earnings, 7.5% dividend yield. We believe that prices will not remain disconnected from fundamentals and that Russian equities should continue to outperform for the rest of the year.
Highlights from the Case for Russia:
- Currency and Fiscal Stability– Russia has moved from a 3.9% fiscal deficit in 2016 to an expected 2% surplus this year, leaving room for increased fiscal spending and upwards revisions for GDP growth expectations.
- Deleveraging and Capital Structure– Russian corporates have been moving toward conservative balance sheet models. Net Debt/Equity levels now stand below 20%. and as low leverage inflates the weighted average cost of capital (WACC), this seems inefficient and we believe that corporates could dramatically increase dividend payouts to shareholders.
- Monetary Policy– Inflation is now under control and the Central Bank of Russia has cut interest rates by 950 basis points since 2015. This should lead to lower net interest expenses for corporates, stronger consumer sentiment and investors shifting assets from bonds to stocks
- Governance– Given improving perceptions of local economic policies, Russia has moved up from 120th place in 2012 to 31st place in 2019 in the World Bank’s Ease of Doing Business rankings. This comes from reduced bureaucracy, improvements in access to electricity, lending, and contract enforcement