The US trade wars with China and partly with a number of EU countries, the growth of protectionism and restrictions, the liquidity reduction by central banks of developed countries, new phase of the US Federal Reserve monetary tightening and fear of a new crisis led to the fourth quarter of the year became the worst for markets all over the world. The MSCI World index in the fourth quarter decreased by 13.7% and lost 16.2% from its high in January of the year.
As for the Russian market, the all mentioned above negative factors were strengthened by the possibility of a further increase of sanctions burden and falling oil prices. The price for Brent has fallen by 37.5% from its maximum levels of the beginning of October, coming close to the mark of $50 per barrel. As a result, the MSCI Russia index fell down by 10.4% in the fourth quarter. The Russian Federation First Mercantile Fund decreased by 11.2%, for the same period, bringing its YTD performance to minus 3.2% for US dollar nominated class and exceeding its benchmark approximately by 2.5%.
Despite all challenges the Russian market performed better in 2018 than many of its EM peers and RTS index took seventh place among 28 indices.
Looking into 2019, despite the inherent challenges still in place, the Russian market will be in a better position compared to other EM markets. The Russian stock market continues to be the cheapest in the world with P/E ratio just above 5. It is approx 3 times less than EM and DM markets have (average EM P/E ratio – 14.8 and DM P/E – 16.2). Further, the Russian market has the highest dividend yield, which has been increasing in the last couple of years. It was especially true in 2018 for interim dividends. A couple of years ago, payouts of 50% of net profits seemed unachievable but now it is becoming the reality especially for the largest oil, gas and industrial companies. It is expected that the average dividend yield in 2019 could be slightly above7% while the average EM dividend yield is 3.7%. Russian equities are trading at very attractive levels coupled with an attractive risk-reward ratio.