The World’s Top Stock Market? Right Now, It’s Russia

Bragging rights for the world’s hottest major stock market this year belong to an unlikely leader: President Vladimir V. Putin of Russia.

The combination of surging Russian share prices and a buoyant ruble has generated some of the best investment returns on earth in 2019. In dollar terms, Russian stocks are up more than 28 percent (and more if you factor in dividends). The S&P 500, by contrast, is up more than 16 percent.

There are fundamental economic reasons for the Russian rally, most notably the rebounding price of crude oil, a cornerstone of the country’s economy.

But the strong performance also reflects investors’ growing confidence that the United States government isn’t going to take further actions that would imperil Russia’s economy.

“This has been heavily driven by perceptions of political risk,” said Jason Bush, a senior analyst at Eurasia Group, a consulting firm. “Last year, anxiety about new U.S. sanctions on Russia was very intense.”

Last year, after the United States imposed sanctions on prominent Russian businessmen, officials and companies — a response to Russia’s interference in the 2016 presidential election, among other things — investors fled.

The country’s stock market dropped by more than 15 percent in dollar terms. Prices also fell in the bond market, making it more expensive for people and companies to borrow money. As capital exited, the ruble tumbled about 20 percent.

For months last year, as relations between Russia and the West deteriorated, investors braced for more bad news. “It’s an uninvestable country, that’s how investors were looking at it last year,” said Lale Akoner, a global market strategist at BNY Mellon Investment Management.

But things thawed. In January, the Treasury Department lifted sanctions on a number of Russian companies. The State Department didn’t impose an expected second round of sanctions related to the March 2018 poisoning in Britain of a former Russian intelligence agent. And congressional legislation aimed at punishing Russia stalled.

“These big financial-sector sanctions that people were worried about — that never materialized,” said Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute for International Economics.

That has left investors to dwell on the fundamentals: a Russian market where stocks appeared dirt cheap after last year’s sell-off, especially in light of the more than 45 percent rise in global oil prices earlier this year. That rally helped shore up the value of the ruble and stopped the slide in Russia’s stock market, most of whose value is in energy companies.

“If oil is performing well, Russia is performing well,” said David Hauner, a markets strategist at Bank of America Merrill Lynch.

Across the board, analysts are lifting their expectations for Russian companies’ profits this year, and some of those companies churn out rich dividends to shareholders. (The dividend yield of the MSCI Russia index is three times as high as the S&P 500 index.) Russia’s relative isolation from the trade war between the United States and China is another selling point.

But buyer beware: Although it has its good years, the Russian stock market is known for volatility. Making money requires impeccable timing.

While Russia’s economy is hitched to exporting commodities, the country’s foreign policy has for years been at odds with its major trading partners in the European Union. Over the long term, the post-Soviet Russian government has repeatedly turned to a policy of weakening the ruble to weather economic shocks, which hurts dollar-denominated investments.

The RTS index that measures Russian stocks in dollar terms, for example, is still down roughly 45 percent from its peak in 2008.

And the Russian economy is showing signs of cooling off, growing just 0.5 percent in the first quarter of 2019 compared with the prior year.

“One thing about Russia is there are always surprises,” said Mr. Bush of the Eurasia Group. “And they’re almost always negative ones.”

Andrew E. Kramer contributed reporting.