Russian stocks are enjoying a rally eclipsing almost all equity markets worldwide this year, thanks to dividend yields that are more than double those of their developing-country peers.

The dollar-denominated RTS Index is up 35%, busting through its pre-2014 sanctions level as worries about potential new political penalties faded. Russian financial stability, currency strength and cheap valuations have also won over investors, with only Greek stocks beating the Moscow benchmark in 2019.

“The dividends have been a game changer,” said Swedbank Robur Fonder AB portfolio manager Elena Loven, who sees the rally continuing into next year. Russian stocks “can easily go up another 40%-50% and still be cheap,” she said.

Big Returns

State companies are among the top 5 stocks in Russia’s RTS Index

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Russia’s state-controlled companies have been under pressure to hand back more profits to the Finance Ministry as dividends in recent years, and stock investors are benefiting as a side effect. Gas exporter Gazprom PJSC has gained 64% since the start of 2019 after it boosted payouts. It plans to distribute half of its net income in dividends in future.

The dividend spree is spreading to state lenders such as Sberbank PJSC and VTB Bank PJSC.

The two banks now have the capital, growth potential and profits to allow a more generous distribution of dividends, said BCS Global Markets analyst Elena Tsareva. “There’s not much growth in the economy or lending, but there are strong dividends and a stable environment.”

Out of 23 Russian members of the MSCI Emerging Markets Index, 15 have delivered total returns surpassing the gauge’s average of 14% this year, according to data compiled by Bloomberg.

Analysts have increased their Russian earnings estimates since the start of the year, while trimming their projections for emerging-market companies in general.

 

EPS estimates for Russian stocks rose while they dropped for EM peers

Russia’s stock indexes are loaded with energy companies, a sector that has been staging a recovery in European equity benchmarks. The Stoxx Europe 600 Oil & Gas Index is trading near the highest level since July amid attractive valuations and optimism around U.S.-China trade talks and their positive impact on global growth.

Surgutneftegas PJSC’s more than 80% rally this year has inflamed market speculation about the intentions of Russia’s fourth-largest oil producer. Some analysts speculate that it may use part of its cash pile to buy a stake in larger rival Lukoil PJSC. BCS analyst Sergey Suverov has also said the gains may be explained by the possibility of some of the money going to shareholders as increased dividends.