So far, 2014 has not been a good year for Russia’s equity markets.1 While the valuation case can certainly be made, geopolitical risk is high, and it’s not easy to transition from looking at the fundamentals of companies to understanding the sanctions that different government actors might apply to selected Russian firms. However, if history is any guide, some of the strongest investments are initiated when conditions appear most difficult.
Surprise: Positive YTD Performance for a Russian Company
Norilsk Nickel2 clearly stands out and has delivered strong year-to-date performance, even in the face of Russian geopolitical turmoil. Even Mark Mobius, executive chairman of the Templeton Emerging Markets Group, has mentioned a favorable view of this firm.3 We compare its year-to-date performance here to:
• MSCI Russian Materials Index: Norilsk Nickel is in this sector;
• MSCI Russian Energy Index: To give an indication of the performance of companies that many believe could be targets for future sanctions; and
• The broad MSCI Russian Index: As an indication of Russian equities generally
Looking at Russia in WisdomTree’s Emerging Markets Indexes
Beyond its year-to-date performance, Norilsk Nickel is notable for another reason. WisdomTree has two emerging markets Indexes with greater than 10% exposure to Russian equities as of July 25, 2014:
There are actually three Russian firms in both Indexes, but Norilsk Nickel stands out as the top holding in Dividend Growers and the sixth-largest holding in Dividend Yielders. The fact that it appears prominently in both Indexes tells us that:
1. Norilsk Nickel is a large payer of cash dividends; both Indexes are weighted on this basis
2. Norilsk Nickel has relatively strong measures of growth & quality, needed to qualify for Dividend Growers
3. Norilsk Nickel has a relatively inexpensive valuation on a dividend yield basis, needed to qualify for Dividend Yielders
Norilsk Nickel: Growth, Quality and Valuation
Norilsk Nickel, over 2012 and 2013, saw its earnings contract. Therefore, it’s important to recognize that the current high earnings growth estimates for the firm are due in part to expectations for recovery. As with any estimate, these estimates may—or may not—prove to be true; there is no way to be certain ahead of time. Additionally, Norilsk Nickel has exhibited a three-year average return on assets above that of both the MSCI Russia Materials Index and the MSCI Russia Index. Below are some of the key drivers of Norilsk Nickel.