When some investors were fleeing Russian stocks as President Vladimir Putin moved to annex Crimea, Pacific Investment Management Co. turned bullish.
The Newport Beach, California-based investment manager has been buying Russian equities amid a decline which, at the height of the conflict with Ukraine, pushed the average dividend yield for the benchmark Micex Index above its estimated 12-month price-to-earnings ratio for the first time since at least 2009.
“Over the past three months, we have used market volatility to increase or initiate positions in high-quality stocks that were sold down to distressed levels,” Masha Gordon, who oversees more than $2.5 billion in assets as the London- based head of emerging-market equities at Pimco, wrote in an email yesterday.
The Micex’s dividend yield on March 14, the last trading day before Crimeans voted to join Russia, was 4.59 percent, while the gauge traded at 4.56 times estimated earnings, data compiled by Bloomberg show. Valuations slumping below payout levels can signal a buying opportunity to investors.
“The market’s dividend yield exceeded its price-to-earnings ratio," Gordon said. “This is very unusual.”
The Russian benchmark gauge’s dividend yield was almost double that of the MSCI Emerging Markets Index at the peak of the crisis in Ukraine, while stocks in the developing-nation measure traded at a multiple more than twice as high as those in Moscow.
The Micex has rebounded to levels last seen before the nation’s parliament voted to approve military action in Ukraine as concern that the U.S. and European Union will impose tougher sanctions eases. The dollar-denominated RTS Index is the world’s fourth-best performer, having risen 27 percent from a more than four-year low on March 14. The Micex is now trading at 5.4 times estimated earnings, compared with 10.9 times for MSCI Emerging Markets Index.
The ruble, which has dropped 4.7 percent this year versus the dollar, the second-worst performance among emerging-market currencies, has boosted Russian exporters’ “competitiveness,” according to Gordon. While the decline is stoking inflation, hurting retailers and eroding demand for government bonds, it’s also increasing the local-currency value of oil exports.
Gordon declined to name the stocks Pimco has bought in recent months. She said its funds continue to hold positions in “attractively priced” OAO Alrosa, the nation’s biggest diamond producer, oil company OAO Bashneft and oilfield services provider Eurasia Drilling Co.
“Going forward, much would depend on the gradual normalization of Russia’s relationship with a global community,” Gordon said. “A sign of confidence for the market would be a return of a Russian issuer to the global capital markets.”
Gordon’s Pimco EqS Emerging Markets Fund has returned 2.1 percent this year compared with a 4.9 percent decline over the past three years, according to data compiled by Bloomberg.
The Micex gained 0.5 percent to 1,477.58 in Moscow today.
President Barack Obama said yesterday that the U.S. and its allies are in “lockstep” agreement to keep pressure on Russia over the Ukraine crisis, and the threat of broader economic sanctions hasn’t receded. Putin was excluded from the gathering of leaders from the world’s leading developed countries, which was originally scheduled to be held in Sochi, in an attempt to punish him for Russia’s stoking of unrest in Ukraine.
The Micex’s three-month historical volatility reached 29.7 percent on May 30, almost three times the level of the MSCI Emerging Markets Index and up from 12.7 percent at the end of February, according to data compiled by Bloomberg.
OAO Lukoil, Russia’s second-largest oil producer, rose 0.5 percent to $58.70 in New York yesterday, extending its gain since March 14 to 14 percent. The company has agreed to build two pipelines to increase the flow from an oilfield in southern Iraq, Oil Minister Abdul Kareem al-Luaibi said in Baghdad yesterday.
OAO Mechel, the Russian steel and coal producer, fell 2.1 percent to $1.90 yesterday in U.S. trading, the lowest since April 28. The stock is down 26 percent this year. Mechel traded at a 39 percent premium to the company’s Moscow-listed shares yesterday.
The Bloomberg Russia-US Equity Index of the most-traded Russian stocks in the U.S. rose 0.8 percent to 91.11. RTS stock- index futures expiring this month increased 0.3 percent in U.S. hours. The Market Vectors Russia ETF, the largest dedicated Russian exchange-traded fund, rose 0.9 percent to $25.88.