Global Investing

Ukraine and the IMF: a sense of deja vu

The West has just agreed to stump up a load of cash for Ukraine but there is a distinct sense of deja vu around it all.

Let’s face it – Ukraine’s track record on how it manages ts economy and foreign affairs isn’t great. This is the third aid programme Kiev has signed with the International Monetary Fund in a decade and two of them have failed. The IMF has its fingers crossed that this one will not go the way of the past two. Reza Moghadam, the IMF’s top European official, tells Reuters in an interview:

They seem to be committed, they seem to own this reform programme and in that sense I am optimistic

Indeed, Ukraine’s new government has taken some brave and politically unpopular  steps, allowing the currency to depreciate and announcing plans to cut gas subsidies that amount to almost a tenth of its annual GDP, according to IMF data. (Here’s a piece from Breaking Views on the shocking energy waste in Ukraine).

But there’s a long road ahead, says Luis Costa, head of CEEMEA strategy at Citi.  According to Costa:

Oil falls. So does the Russian stock market

Russian equities have had their worst week since early-December, with losses of over 6 percent. But don’t look too far for the reason — world crude futures have fallen to three-month lows around $114 a barrel on worries that U.S. and world economic growth may not be picking up after all.  They too have fallen 6 percent so far this week. Check out the following graphics showing how Russian stocks and its currency move in lock-step with oil prices:

If anything, the falls on Russian assets are outpacing the weakness on global crude oil markets in recent months, possibly because the jitters that caused last December’s massive falls have not been entirely overcome. Anti-government demonstrators are no longer hitting the streets but  with President-elect Vladimir Putin to be sworn in next week, fears are the  Kremlin may prefer squeezing more cash from energy companies to implementing the reforms the economy desperately needs.  Latest plans flagged on Thursday  to raise oil and gas extraction taxes would seem to confirm these worries and are hitting energy sector shares — half the Moscow index.

All this has widened Russian stock valuations to almost record levels against the broader emerging equity set.  But that is unlikely to entice buyers if the oil price stays where it is — after all half of Russia’s revenues come from oil and it needs an oil price of around $120 a barrel  to balance its budget. Chris Weafer, chief strategist at Troika Dialog puts it succinctly:

In defence of co-investing with the state

It’s hard to avoid state-run companies if you are investing in emerging markets — after all they make up a third of the main EM equity index, run by MSCI. But should one be avoiding shares in these firms?

Absolutely yes, says John-Paul Smith at Deutsche Bank. Smith sees state influence as the biggest factor dragging down emerging equity performance in the longer term. They will underperform, he says, not just because governments run companies such as Gazprom or the State Bank of India in their own interests (rather than to benefit shareholders)  but also because of their habit of interfering in the broader economy.  Shares in state-owned companies performed well during the crisis, Smith acknowledges, but attributes emerging markets’ underperformance since mid-2010 to fears over the state’s increasing influence in developing economies. (t

Jonathan Garner at Morgan Stanley has a diametrically opposing view, favouring what he calls “co-investing with the state”.  Garner estimates a basket of 122 MSCI-listed companies that were over 30 percent state-owned outperformed the emerging markets index by 260 percent since 2001 and by 33 percent after the 2008 financial crisis on a weighted average basis. The outperformance persisted even when adjusted for sectors, he says (state-run companies tend to be predominantly in the commodity sector).

Discovering the pleasure of dividends in Russia

American financier J.D. Rockefeller said watching dividends rolling in was the only thing that gave him pleasure. But it is a pleasure which until now has largely bypassed shareholders in most big Russian companies. That might be about to change.

Russian firms,  especially the big commodity producers, are generally seen as poor dividend payers. So dividend yields, the ratio of dividends to the share price,  have been unattractive.

On a trailing 5-year period, the average dividend yield in Russia was 1.8 percent compared to 2.5 percent for emerging markets, notes Soren Beck-Petersen, investment director for emerging markets at HSBC Global Asset Management. That absence of positive cash flow from companies is one reason why Russia has always traded so cheap relative to other emerging markets, he says.