By Christopher Gannatti
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 (OTCPK:NILSY) 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:
- WisdomTree Emerging Markets Equity Income Index (Dividend Yielders): 18.06%
- WisdomTree Emerging Markets Dividend Growth Index (Dividend Growers): 11.35%
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:
- Norilsk Nickel is a large payer of cash dividends; both Indexes are weighted on this basis.
- Norilsk Nickel has relatively strong measures of growth & quality, needed to qualify for Dividend Growers.
- 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.
Norilsk Nickel: World's Largest Producer of Nickel & Palladium
While uses for nickel and palladium might not readily come to mind, many of us are familiar with stainless steel (nickel is an important ingredient) and automobiles (palladium serves an important pollution-reduction function in car exhaust systems). Norilsk Nickel claims to be the world's largest producer of these metals.4 Additionally, year-to-date5:
- Nickel is up nearly 40%;
- Palladium is up more than 20%; and
- The S&P GSCI, a broad measure of commodity prices, is up only 2%.
While the price behavior of these metals is certainly important for Norilsk Nickel, their divergence from a broader measure of commodity price behavior makes it all the more interesting.
Index Screening Date: September 30, 2014
The most important feature of WisdomTree's fundamentally weighted equity Indexes is the fact that they rebalance annually. To remain in Dividend Growers, Norilsk Nickel must prove itself annually on measures of growth and quality. To remain in Dividend Yielders, Norilsk Nickel must maintain a high dividend yield. If included, weighting is then based on Norilsk Nickel's cash dividends. Until this annual Index Screening, we hope that Norilsk Nickel can continue to be a beacon of positive performance in an otherwise difficult Russian equity landscape.
- Refers to the performance of the MSCI Russia Index from 12/31/13 to 7/25/14.
- As of 7/25/2014, Norilsk Nickel was a 0.45% weight in the WisdomTree Global Equity Income Index, a 3.65% weight in the WisdomTree Global Natural Resources Index, a 3.32% weight in the WisdomTree Global ex-U.S. Dividend Growth Index, a 1.64% weight in the WisdomTree Commodity Country Equity Index, a 3.08% weight in the WisdomTree Emerging Markets Equity Income Index and a 6.21% weight in the WisdomTree Emerging Markets Dividend Growth Index.
- "Templeton Invest Fund Cuts Stakes in Russia's Sberbank, LUKoil, Alrosa," The Moscow Times, May 29, 2014.
- Source: Norilsk Nickel company website, as of July 2014.
- Source: Bloomberg, with performance measured from 12/31/13 to 7/25/14.
Important Risks Related to this Article
Investments focused in Russia are increasing the impact of events and developments associated with the region, which can adversely affect performance.
Dividends are not guaranteed and a company's future ability to pay dividends may be limited. A company currently paying dividends may cease paying dividends at any time.
Christopher Gannatti, Associate Director of Research
Christopher Gannatti began at WisdomTree as a Research Analyst in December 2010, working directly with Jeremy Schwartz, CFA®, Director of Research. He is involved in creating and communicating WisdomTree's thoughts on the markets, as well as analyzing existing strategies and developing new approaches. Christopher came to WisdomTree from Lord Abbett, where he worked for four and a half years as a Regional Consultant.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.