Russian companies at a discount

Russian business daily Vedomosti looked at how foreign investors value publicly traded Russian companies and found that they trade at a noticeable discount compared to their peers in China, Turkey, Brasil, South Africa and some other countries. Experts were quoted saying that the discount amounts to as much as 50 percent, half of which is attributable to a traditionally low price/earnings ratio for oil companies, while the other half constitutes a risk discount. Fund managers and investors find that the Russian stock valuations have remained more or less the same during the past year and that the perception of country political risks has not changed for the better. All this in spite of the factors that should have provided a positive impulse on the market: the elections are over, oil prices remain high, and consumer spending is growing at a fast pace. Furthermore, some analysts expect that investors might reduce the share of Russian stocks in their portfolios in the near future.

As the overall economy and profitability of Russian companies are growing, perceived political risk seems to be the only explanation for discounts at which Russian stocks are valued. The fact that some of the investors declined to comment on the subject as they were afraid it might hurt their business in Russia testifies to the presence of an intangible effect that creates tension. Quantitative easing by the U.S. Federal Reserve in September provided investment funds with excess liquidity that flowed into the developing markets – that is, all of them except Russia, which registered an outflow of USD 50 million last week alone (compared to an inflow of USD 589 million in other BRIC countries). JP Morgan’s official was quoted saying that the value of the Russian stock exchange index MICEX (consisting of 30 relevant stocks) has not changed since the beginning of the year, while average daily volumes decreased by 40 percent, from USD 2 billion to USD 1.2 billion.

Further analysis revealed that the investors are most concerned about the government’s perceived intrusion in the private sector, its disregard for minority shareholders’ interests, delayed reforms and privatization, and uncertainties regarding tax and tariff policies in the oil and gas sector. Russian Government recently decided that the oil giant TNK-BP will not pay any dividends after it was taken over by state-owned Rosneft, which made the minority shareholders unhappy and concerned about future dividend policies of state-owned companies in general. According to some analysts, the Government could easily create a positive momentum by mandating that all state-owned companies pay at least 25 percent of their net profit as dividends. As things currently stand, positive performances of private companies with high dividend yields fail to compensate for the above listed concerns.

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