Russia gets a lot of negative press, but did you know its stock market is beating the S&P 500 so far in 2021? The U.S. market has returned about 20% the year to date, while Russia’s MOEX Index has increased more than 31%.
Foreign direct investment (FDI) has been flowing into Russia in 2021 for several reasons. Among them is it offers positive real rates compared to other Central and Eastern European (CEE) countries. At a time when most countries are keeping rates near zero to combat the negative effects of the health crisis, the Bank of Russia is in tightening mode, having raised rates five times so far in 2021, most recently on September 10th. This has attracted investors looking for higher yielding instruments.
The Russian economy has also been supported by stronger oil and gas prices. The price of Brent Crude, the international benchmark, has increased @ 75% this year, which has supported several Russian oil exploration and production companies. Among them are Rosneft, up 35% Lukoil, up 38%; and Gazprom, up a whopping 73%.
Russia’s extra revenue from the sale of oil and gas will be spent on social benefits that will further boost the economy into 2022.
Besides the recovery in oil prices, the Russian market can expect to benefit into 2022 from an easing risk of further international sanctions and an influx of retail investors.
Russian stocks are also undervalued when compared to other regions, making it attractive to investors. The chart below shows selected economies’ current price-to-earnings (P/E), which indicates how “expensive” an index or stock is. As of mid-September 2021, the Russian stock market was trading at a little over nine times earnings, putting its valuation well below other emerging markets, not to mention developed markets such as Japan, the EU, and the U.S.
Russia also has some of the most attractive dividend yields relative to other regions. As of September, Russian stocks had a trailing 12-month dividend yield of 4.45%, almost double the average yield of the emerging markets universe.
There are other reasons to be optimistic about Russia. Tariff negotiations with China are on-going as concerns a Free Trade Agreement with the Eurasian Economic Union (EAEU) which when finalized will allow improved access to China’s massive consumer population and boost non-energy exports. The Eurasian Economic Union, which includes Russia, along with Armenia, Belarus, Kazakhstan, and Kyrgyzstan is also in FTA negotiations with India, another huge consumer market, while negotiations are underway with numerous ASEAN nations, including Indonesia and Thailand. Vietnam, which already has an FTA with the EAEU, has called for the entire ASEAN bloc to enter into an FTA with the EAEU. A combination of Russian and EAEU free trade with ASEAN, China and India would provide a significant boost to the Russian economy and has the potential to dramatically alter Eurasian trade corridor and supply chains.
At present, Russia is flying under the radar for many, but current trends and upcoming trade agreements are looking very positive for a strategic reemergence of Russia in Asian trade during 2022.