‘This provides an important source of returns for investors and represents a major first step in the improvement of corporate governance standards,’ commented Oleg Biryulyov, manager of the JPMorgan Russian Securities investment trust.
The income boost stems from two government demands: first, to generate revenues from its holdings in state-owned enterprises; and second, to raise the price it can secure from privatising some of those stakes.
‘If this policy is sustained we should see a re-rating of investment multiples for the market,’ Biryulyov argued, ‘as higher company valuations will be supported with a reasonable level of yield.’
He added: ‘Dividends are a sign of maturity in certain sectors, such as mobile telephony companies, and it is pleasing to see that management in such sectors is acting prudently by releasing part of their capital back to shareholders via dividends.’
However, one sector traditionally favoured by income investors has proved disappointing in Russia.
‘Utilities are highly regulated businesses in Russia within a generally poorly regulated economic environment,’ said Biryulyov. ‘The state would like to see a substantial level of capital investment across infrastructure projects, which makes the utility sector in Russia different from other markets through the absence of free cash flow generation and large or stable dividends.’
The government’s interference to keep utility rates low has also reduced the industry’s appeal to investors.
Elsewhere in the Russian market, state involvement buoyed the fortunes of Transneft (MCX:TRNFP), as shares in the oil-pipeline group gushed up 70 per cent in the second half of last year.
‘The market suddenly decided to give it credit for a potential change in corporate governance and the potential conversion of this stock to a high yielding asset’, explained Biryulyov.
His fund missed out on this rally, though, and ‘had to eat humble pie on the back of it’. But Biryulyov remained defiant: ‘We believe that this company is not managed in the interests of minority shareholders and is very unlikely to generate free cash flow any time soon.’
A second development in Russia noted by the manager was a widening difference between the valuations of large-caps and small-caps, as the giants became expensive and the minnows stayed cheap.
Biryulyov attributed this to the flows into the Russian market from exchange-traded funds, which feed demand for the large-caps. He contended that this was ‘not sustainable’, but recognised that it would ‘continue to distort the market picture’.
‘We know that current valuations do not reflect the potential of businesses in a normal environment,’ Biryulyov concluded, ‘but of course whether Russia becomes a normal market is a key question for all investors. Timing the Russian market never was and never will be easy, so as investors we have to adapt to its internal level of volatility and adopt a long-term approach to help smooth the extremes of the market.’
To exemplify the opportunities for re-ratings, though, he cited Sollers (MCX:SVAV) and Eurasia Drilling (LON:EDCL) after ‘the market realised that their operations were intact when valuations looked too low’. Shares in the former have risen by 117 per cent over the past 12 months, while the latter has gained 52 per cent.