Much has been said about the negative 3.8% performance year-to-date of the MSCI Emerging Markets Index, hailing it as some piece of proof that developed markets offer superior investment returns over emerging markets — they don’t.
Over the long-term, emerging market economies grow faster with lower debt levels and have positive demographics, so the stock markets will surely follow. Plus, there are emerging markets that are doing much better than the headline MSCI EM Index, the S&P 500 and other BRIC indexes.
BRICs Never Come in Same Shapes and Sizes
I had a lot of great things to say about Russia investments in January, and so far, my thesis that there is a massive rerating of their stock market continues to materialize. Russia is up 11.3% this year, while BRIC cousin India is down 12.6%. This massive outperformance is due not only to the fact that it is a great inflation hedge, but because the Russian government is finally getting serious about mending fences with foreign investors who felt alienated after two decades of problems. The investing climate, which got a little off track in the past decade, is now much better than the wild years of the 1990s. And if Mr. Putin is serious this time, it may change dramatically in the next 10 years.
How much room for rerating is there for Russia? The Russian benchmark Micex Index has a P/E of 7.3 based on 2011 earnings estimates. That compares with 10.6 times for Brazil’s Bovespa, 13.6 for the Shanghai Composite Index, and 16.7 for India’s Sensex. In other words, Russian stocks are half as expensive as Chinese stocks and a little less than half when compared to Indian stocks.
Check out the chart below that compares to the Russian RTS Index (RTSI) and the Bombay Stock Exchange (BSE):
A good way to track the Russian benchmark index and play that valuation catch-up over the long haul is the Market Vectors Russia ETF (NYSE: RSX).
A Cheap Russian Oil Play
I almost entered InvestorPlace’s 10 Best Stocks for 2011 stock-picking contest, but instead, I made a side bet with the organizer and entered it in unofficial capacity — my pick is Lukoil (OTC: LUKOY).
Lukoil is attractive because the huge overhang due to the sale of ConocoPhillips’ (NYSE: COP) 20% stake is finally through — COP had to liquidate a $9 billion position. This kept the stock depressed in 2010 at a time of elevated oil prices. With COP out of the picture, Lukoil has a lot of room to run in 2011. In 2010, Lukoil traded at one point with a hefty P/E of 5, and after the current share recovery, it now trades at the gargantuan P/E of 7.
For 7 times earnings you get 1.1% of global oil reserves and 2.3% of global oil production — the third largest non-state publicly traded oil company worldwide by proven reserves of hydrocarbons. Sounds like a good deal to me.