Citi From Russia With Love

Equity strategists at Citi Global Markets came with a new hit "From Russia with Love" yesterday:

The PE ratio probably exaggerates Russia’s valuation discount. One reason Russia’s multiple is so low is the market’s heavy weight in energy stocks, which look cheap everywhere. Understated depreciation, low payout ratios and high capex needs also play a role in this discount.

Nevertheless, Russian stocks do look cheap to us. A review of PE, PB, EV/EBITDA, free cash flow yield and EYR metrics all suggest that Russia is at the bottom of the emerging market valuation spectrum, even if we adjust to account for Russia’s sector weights. One exception: dividend yield.

Click on chart to enlarge, courtesy of Citigroup Global Markets.

As to earnings yield ratio vs. bond yields:

The earnings yield ratio is another metric worth watching... This ratio, by which the earnings yield or inverse of the PE is compared with the bond yield, is particularly flattering to Russia given the current level of external debt yields and the relatively narrow Russian Eurobond spread. Russia’s earnings yield of 17% is triple the eurobond yield of 6%, a ratio that is very unusual in a global context (Figure 15).

You never know for sure why the discounts ...