December 12, 2013 / 5:06 PM / 7 years ago

Russian stocks to rise 6 percent in 2014, dividends lure

MOSCOW (Reuters) - Russian shares are expected to rise 6 percent in 2014, recouping only some of this year’s losses, as investors are lured by an attractive dividend yield and equity market valuation, a Reuters poll found.

Russia’s emergence as an equity value play follows a lackluster year. Investors, spooked by a slowing economy, shoddy treatment of minority shareholders and a Kremlin crackdown on political opposition, fled the country.

That has magnified the impact of a new requirement for state firms to pay more of their profits out in dividends - attracting yield-hungry investors.

Some analysts say, however, that the payout rules represent a tax on business rather than a potential source of growth for investors.

The median forecast from a poll of 11 analysts, taken in the past week, predicted the country's dollar-denominated RTS stock index .IRTS - down 8 percent so far this year - would end 2014 at 1,500 points.

Russian stocks are currently undervalued based on price to earnings. The discount to other emerging markets increasing to 53 percent versus 50 percent a year ago on a 12-months forward price-earnings ratio.

“Russian stocks trade at such a low multiple partly because of fears over corporate governance and treatment of minority shareholders,” said Bruce Bower, a partner at Moscow hedge fund Verno Capital. “The fact that companies are paying high dividends should go a long way to address this concern - it’s hard to argue with cash in the bank.”

Credit Suisse analysts calculated Russia is trading on a dividend yield of 3.4 percent, around 30 percent higher than emerging markets overall. Russia’s government is planning to make state-owned companies pay higher dividends of 35 percent of their profits by 2016.

However, investors are worried about Russia’s economy, after the government slashed its growth forecast to 2.5 percent for 2014, as well as lack of progress on reforms such as the country’s plans to privatize assets.

“The domestic economy is in a worse state currently than it was at (the end of 2012),” said Peter Westin, equity strategist at Aton. “Most concerning is the lack of fixed investment amidst continuous private sector capital outflows.”

Around $3.4 billion has been pulled out of Russia-dedicated funds so far this year, according to Gazprombank.

Delays to the expected tapering in the U.S. bond-buying program, which had provided a source of dollars which find their way into emerging market stocks and currencies, have also kept investors on edge.

Analysts grew more pessimistic about 2013 as the year progressed. In March, analysts expected a 11 percent gain to 1,700. An October poll predicted 1,500.

The fall this year has nearly wiped out a 10 percent gain in 2012. In 2011, the index fell 22 percent.

Reporting by Maya Nikolaeva, Olga Popova Editing by Jeremy Gaunt.

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