Russian equities will extend their best quarter in a year in U.S. trading as tensions over Iran’s nuclear program spur oil higher and the cheapest valuations among emerging markets lure investors, according to UBS AG.
The Bloomberg Russia-US Equity Index (RUS14BN) of Russian companies listed in New York jumped 18 percent in the first quarter, the most since the first three months of 2011. OAO Surgutneftegas (SGTPY:US), the country’s fourth-largest oil producer, was the biggest gainer, posting its best January-March advance since 2000. OAO Lukoil, the biggest non-state crude company, climbed 14 percent, the most in any quarter since the start of 2011.
Moscow’s Micex Index (INDEXCF), which had its best quarter since the last three months of 2010, trades for 5.8 times analysts’ earnings estimates for member companies, the cheapest valuation among 21 developing markets tracked by Bloomberg and below the 10.7 ratio for the MSCI Emerging Markets Index. Crude, Russia’s biggest export earner, has rallied as the U.S. and Europe intensify sanctions against Iran over its nuclear program, and the Persian Gulf state threatens to shut the Strait of Hormuz, a transit route for a fifth of the world’s oil.
Russia “is still the cheapest of all emerging markets, and were the price of oil to remain elevated as it looks like it’s doing, we expect that market to continue to attract investors,” Nicholas Smithie, an emerging-market equities strategist at UBS in New York, said by phone on March 30.
The world’s largest energy exporter, almost 50 percent of Russian government revenue last year came from energy sales, which contribute about 17 percent of gross domestic product.
The Micex may rise to 7.4 times analysts’ earnings estimates for member companies should oil prices continue to climb, according to UBS. That would still leave Russia as the cheapest of the biggest emerging stock markets, with the valuation on Brazil’s Bovespa Index (IBOV) at 10.3 times estimated earnings, 9.2 times on the Shanghai Composite Index (SHCOMP) and a ratio of 13.4 for the BSE India Sensitive Index. (SENSEX)
“Russia will always be a cheap market, the Achilles’s heel of the Russian market is there is no rule of law,” said UBS’ Smithie. “As long as investors aren’t able to enforce the rights of property and rights of contract, the market will trade at a discount.”
Viewed as the world’s most corrupt major economy, according to Transparency International, Russia has been criticized by the World Bank and ratings companies for its energy-dominated economy and inaccessibility to foreign investors.
Companies aren’t yet required to report earnings to international standards and President-elect Vladimir Putin has a history of intervening in private business, orchestrating the takeover of top oil producer OAO Yukos Oil Co. in 2003 and halving coal miner OAO Mechel’s share price in 2008 by alleging it fixed prices.
Futures (VEA) expiring in June on Moscow’s RTS (RTSI$) Index added 0.5 percent to 159,195 in U.S. trading on March 30. The Bloomberg Russia-US Equity Index gained 1.2 percent to 107.28, the most since March 23, boosting the measure’s advance last quarter to 17 percent, the most in a year. Every company on the 14-stock gauge rose last quarter.
United Co. Rusal (486), the world’s largest aluminum producer, lost 2.5 percent to HK$5.80 in Hong Kong trading as of 11:16 a.m. local time. The MSCI Asia Pacific Index was little changed.
American depositary receipts of Surgutneftegas fell 0.6 percent to $7.08 in New York on March 30, trimming their first- quarter jump to 39 percent, the most of all stocks on the index of Russian U.S.-listed companies. The ADRs traded at a 0.1 percent discount (SGTPY:US) to Surgutneftegas’ Micex-listed preferred shares on March 30, from a 1.8 percent premium the day before. Each ADR is equal to 10 ordinary shares.
Crude oil for May delivery climbed 0.2 percent to $103.02 a barrel on the New York Mercantile Exchange on March 30, bringing its gain in the quarter to 4.2 percent, the least since the three months to Sept. 30, 2009.
Brent oil for May settlement rose 0.4 percent to $122.88 on the London-based ICE Futures Europe exchange, adding 15 percent last quarter. Urals Crude, Russia’s chief export blend, advanced 0.4 percent to $119.63 on March 30, up 13 percent in the quarter, the most in a year.
“If you’re looking for an investment right now, Russian oil companies are very attractive, because the stock prices are still so depressed,” John Connor, founder and portfolio manager of the Third Millennium Russia Fund, which manages $20 million including shares of state-run gas export monopoly OAO Gazprom, said by phone from Florida on March 30.
Russia ETF Gains
ADRs (PBR:US) of Lukoil, Russia’s second-largest oil producer, climbed 14 percent in the quarter to trade at 4.4 times estimated earnings, the lowest since Feb. 22. That compares with the 7.7 times valuation for ADRs of Petroleo Brasileiro SA (PETR4), Brazil’s state-controlled oil company, data compiled by Bloomberg show. Petrobras shares in the U.S. added 6.9 percent in the first quarter.
Crude in New York will climb to $106 a barrel by the end of 2012, according to the median of 28 analysts’ estimates compiled by Bloomberg. Lukoil (LKOH) gained 4.7 percent on the Micex last quarter, the most in a year.
The Market Vectors Russia ETF (RSX:US), a U.S.-traded fund that holds Russian shares, rose 0.7 percent to $30.88 on March 30, boosting its advance in the quarter to 16 percent, the most since the last three months of 2010. The RTS Volatility Index (RTSVX), which measures expected swings in the index futures, dropped 2.1 percent to 31.92.
Russian equity funds posted inflows of $1.2 billion in the first quarter, compared with the $3.6 billion recorded for the same period of 2011, according to data research firm EPFR Global. The average emerging-market equity portfolio saw a 13.5 percent increase in inflows for the quarter through March 28, according to Cameron Brandt, EPFR’s director of research.
Yandex NV (YNDX:US), Russia’s most popular Internet search engine, was the second-biggest gainer in the first quarter on the Bloomberg Russia-US gauge. The stock jumped 6 percent to $26.87 in New York, the highest price since Nov. 8. Yandex gained 36 percent in the quarter, bringing its advance since being listed in May to 7.5 percent.
JPMorgan Chase & Co. raised Yandex’s target price (YNDX:US) to $44 per share from $40 on March 30, saying in a research report that The Hague, Netherlands-based company’s consolidated revenue in the first quarter probably rose about 60 percent from a year ago on higher demand for online advertising, revising up a previous estimate.
Yandex reports first-quarter earnings in early May, according to the JPMorgan report.
OAO Sberbank (SBRCY:US), Russia’s largest lender, gained 35 percent last quarter, the third-biggest advance on the Bloomberg Russia- US index. Each ADR is equal to four ordinary shares and the U.S.-listed stock traded at a 3.7 percent premium (SBRCY:US) to the bank’s Micex shares on March 30, the most since Nov. 30, according to data compiled by Bloomberg.
The 30-stock Micex climbed 8.2 percent in the first quarter, its second straight quarterly advance, while the dollar-denominated RTS (RTSI$) surged 19 percent, the best performance since the third quarter of 2009.
Gazprom’s (OGZPY:US) ADRs gained the most in two weeks in New York on March 30, on speculation the world’s largest natural gas producer will pay a record 2011 dividend after profit doubled. The stock has risen 16 percent in New York this year, the biggest quarterly advance since the first three months of 2011. The ADRs trade at a 0.1 percent premium to Micex shares.
Net income for state-run Gazprom, based on Russian accounting standards, more than doubled to 880 billion rubles ($30 billion) last year as the company benefited from rising European gas prices, according to the earnings report issued on March 29.
Gazprom may pay a record-high dividend of 9.29 rubles a share for last year, according to the average analyst estimate compiled by Bloomberg and based on profit levels and company dividend guidance.
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