Lately it hasn't been easy out there for yield-seeking investors. Government bonds have continued to rally around the world, pushing yields to record or near-record lows. More than a few have even fallen into negative territory. In the middle of June, the amount of negative-yielding debt globally reached a record $13 trillion, with more than half of all government debt in Western Europe below zero.
Until now, this trend hasn't been seen in emerging Central and Eastern Europe (CEE) economies, but that's beginning to change. According to Bloomberg, all of the Czech Republic's bonds were trading at negative real (inflation-adjusted) yields as of July 8, while the yield on Poland's 10-year note was just slightly above zero.
So where can investors turn?
Emerging Europe Equities Offer Some of the Best Yields Right Now
I believe one of the best places in the world to find yield right now is emerging European equities, many of which feature generous dividends and stock buyback programs. Take a look at the chart below. Russia, the Czech Republic, Turkey and Greece all offer some of the highest combined dividend and buyback yields in the entire emerging market (EM) ecosystem. At around 7 percent, Russian stocks had the best yields among emerging European countries as of June and were second only to Argentinian stocks, according to JPMorgan.
One of the most generous dividend policies, I believe, is offered by Sberbank (OTCPK:SBRCY), Russia's largest bank. The bank is paying out 43.5 percent of its net profit for 2018, which comes out to $5.62 billion, or around $0.25 per share. In a June 12 note to investors, analysts at Renaissance Capital made Sberbank one of their top equity picks for the remainder of 2019. They also recommended natural gas producer Gazprom (OTCPK:OGZPY), gold mining company Polyus (OTCPK:OPYGY) and Globaltrans Investment [GLTR:LI].
Russia Has Led Global Equity Rally So Far in 2019
There are other reasons why I find emerging Europe so compelling, and Russia in particular. Russian stocks have had a good run so far in 2019, surging 30 percent year-to-date through July 5 on a number of factors. For comparison's sake, the S&P 500 Index rose 19 percent over the same period.
Chief among the contributing factors has been the huge price rally in crude oil, responsible for approximately 60 percent of Russia's exports and some 30 percent of its gross domestic product. Renaissance Capital reports that the country's budget is "comfortably in surplus… with budget parameters calculated using $40 a barrel real oil prices." Crude was trading above $65 per barrel as of June 12.
In addition, geopolitical conditions have improved. Russian stocks sold off last year, prompted by additional U.S.-imposed sanctions. However, in January, the Treasury Department lifted a number of these sanctions, and the State Department declined to impose any new ones involving the March 2018 poisoning of a former Russian intelligence agent. Investors seem confident that the U.S. won't take any further actions - in the near term, at least - that might hurt the Russian economy.
For these reasons and more, Russia's credit rating has recently been raised to investment grade by the three major rating agencies - Standard & Poor's, Moody's and Fitch.
Finally, Russian stocks are trading at very attractive multiples right now. According to Renaissance Capital, Russia is trading on a 12-month forward price-to-earnings of 5.9x, the second lowest among EMs.
The Bloomberg Barclays Global Aggregate Negative Yielding Debt Market Value Index measures the stock of debt with yields below zero issued by governments, companies and mortgage providers around the world which are members of the Bloomberg Barclays Global Aggregate Bond Index.
The MSCI Russia Index is designed to measure the performance of the large and mid-cap segments of the Russian market. The MSCI Emerging Markets Europe Index captures large and mid-cap representation across six Emerging Markets countries in Europe. The S&P 500 Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.
A bond's credit quality is determined by private independent rating agencies such as Standard & Poor's, Moody's and Fitch. Credit quality designations range from high (AAA to AA) to medium (A to BBB) to low (BB, B, CCC, CC to C). The forward price-to-earnings ratio (forward P/E) is a valuation method used to compare a company's current share price to its expected per-share earnings.
Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of (06/30/2019): Sberbank of Russia PJSC, Gazprom PJSC, Polyus PJSC, Globaltrans Investment PLC.
Disclosure: I am/we are long SBRCY, OGZPY, OPYGY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. U.S. Global Investors, Inc. is an investment adviser registered with the Securities and Exchange Commission ("SEC"). This does not mean that we are sponsored, recommended, or approved by the SEC, or that our abilities or qualifications in any respect have been passed upon by the SEC or any officer of the SEC. This commentary should not be considered a solicitation or offering of any investment product. Certain materials in this commentary may contain dated information. The information provided was current at the time of publication.