First a disclaimer for the hurried: this is not an opinion piece about how Russian society is better than Europe’s. It is not about how Europe is colluding with the U.S. to destroy innocent Russia, making them angelic by comparison. If that is a belief in which you are seeking validation, or should you believe Russia is the seat of all evil and are looking to pen poetically nasty comments, then you have duly come to the wrong place. Note: it is always wise to read the sub-headline. It describes the article better.
However…if you are an investor in the Market Vectors Russia (RSX) exchange traded fund, take heart, my friends! The CFA Institute’s survey of some 120,000 chartered financial analysts lists Russia as the fourth most attractive market for investment in 2015.
The U.S. is No. 1, followed by China and India. Russia kicked out Germany this year.
Of course, everyone who has ever heard of Baron Rothschild and Warren Buffet knows you buy when there is blood in the streets. As Buffet once said, "You pay a high price for a cheery consensus.”
Russia, for all its problems, is a contrarian delight.
Jeremy Schwartz spells it all out for us in a Wisdom Tree blog post on Thursday, following his return from a CFA dinner in Denver. Schwartz is Wisdom Tree’s research director. He notes the obvious, that Russia is "out of favor due to the huge collapse in oil prices…and as a result of the sanctions Russia is enduring over the political situation in Ukraine.” But Schwartz’s post gives us the lowdown on what the U.S. asset manager think about Russia.
For starters, the very mention of Russia brings up nervous laughter. Yet, get a few value hungry global investors who think India is over-loved and Russia is over-hated sitting at a table and Russia suddenly looks plausible. To some guys, Russia is like a lover you know shouldn’t be with but cannot resist. To others, its more a horror movie, where the bumbling idiot is running from doom only to seek shelter in a tool shed full of gassed-up chain saws.
Though let’s face it, Gazprom looks pretty good trading at 4x earnings. This is the biggest gas producer in Eurasia and Europe’s single biggest supplier of natural gas. It’s too cheap to ignore.
Schwartz quotes Howard Marks, chairman of Oaktree Capital Management: "Most great investments begin in discomfort. The things most people feel good about investments — where the underlying premise is widely accepted, the recent performance has been positive and the outlook is rosy — are unlikely to be available at bargain prices. Rather, bargains are usually found among things that are controversial, that people are pessimistic about and that have been performing badly.”
It’s pretty bad in Russia. Barclays Capital said Wednesday that the economy was falling into ”deep recession.”
Russia may be returning to its Soviet days politically, as some may think. But it is also turning to fall-of-Soviet Union style asset prices. This has made many investors very rich in the past.
The 20 year average price to earnings ratio for Russian stocks, which takes us back to 1995, four years after the fall of the U.S.S.R., stands at 6.6x. Russia always trades at a discount. It’s the untrustworthy Wild East, after all. By comparison, the 20-year median price to earnings for the MSCI China Index is 13.3x and 13.1x for the MSCI Emerging Markets Index. Fast forward to January 2015 and the price to earnings ratio for Russian equities, as measured by the MSCI Russia Index, is just 3.4%.
Investors are taking notice of the Russian flea market again this year.
The Market Vectors Russia ETF is up 12.85% year-to-date, beating the MSCI Emerging Markets and the S&P 500. It is also better than Wisdom Tree India (EPI), the darling of the big four emerging market ETFs this year. EPI is up 7.12%.
The Russian Central Bank has done a better job at managing currency volatility. Despite the ever-strengthening dollar and weaker oil prices, the ruble is down only 2.6% against the dollar. The euro is down over 14%.
When it comes to Russia, few long term investors take the Rothschild view.
"Russia is too cheap to be ignored, but until something changes on the ground we will pass,” says Ben Rozin, senior analyst at Manning & Napier, a $47.8 billion asset manager in Rochester, NY. Rozin told me they used to own Russian tech companies Mail.ru and Yandex, but got out of Russia just after the market spiked in the second quarter. Investors did the same thing in Russia back then, bought on the cheap thanks to bad news of political unrest in Crimea. Sanctions followed. RSX rose steadily. Following Russia’s official annexation of Ukraine’s Crimean peninsula on March 17, the ETF rose 22% in four months.
"The issue we have is: what does that cheap price get you? Are foreign investors going to feel good about coming back to Russia in a year or two? We don’t see yet what they will be excited about,” says Rozin.
Russia may be in fourth place behind the U.S., but it is a distant fourth. Investors still like the U.S. for equity and fixed income thanks to all the things Russia does not have: cheap capital costs, low inflation, transparent government and transparent companies in a growing, diversified economy.
Meanwhile, oil and politics remain the biggest risk factor. That’s something Europe doesn’t have to worry about either. In fact, cheaper oil is good for most of Europe. And so is a weaker euro, because it makes exports more affordable to foreign buyers.— Naeem Aslam on the BBC discussing Russia political risk and its impact on Russian assets near-term.
"As long as we do not see de-escalation of tensions between Ukraine and Russia, the selling pressure will remain on the Russian rubble,” warns Naeem Aslam, chief market analyst at AvaTrade International. ”Economic sanctions and geopolitical tensions are the major threat for the Russian economy,” he says from his Dublin office. "We want to see a substantial increase in the demand for crude. This will provide strength for the ruble.”