by Charles Sizemore | February 7, 2014 8:26 am
Vladimir Putin kills puppies.
OK, that comment probably needs a little context. The president of Russia does not personally murder small dogs for sadistic pleasure. But in preparation for the winter Olympics, the Sochi city government has culling the large local stray dog population by poisoning their food.
An authoritarian regime can lock political dissidents in jail and commit untold numbers of human rights abuses. But poisoning dogs by the hundreds just seems … well, for lack of better word, mean.
Sochi’s dogs are not the only ones at risk these days. A CNN poll says 57% of Americans believe that a violent act of terrorism at the games is likely. And pity the poor residents of Sochi itself. Human Rights Watch has an entire page dedicated to listing out human rights abuses in the lead-up to the games, including everything from forced evictions of locals, abuse of migrant workers and intimidation of the media.
But while all of this might make Russia an unpleasant place to live, none of it necessarily makes Russia a bad investment destination, does it? After all the bad press Russia is getting, might Russian stocks be a decent contrarian investment?
Let’s look at the numbers.
What exactly are you buying when you buy Russian stocks? Well, you’re most likely going to do it through ETFs that track the Russian market, so let’s take a look under the hood of the Market Vectors Russia ETF (RSX), the iShares MSCI Russia Capped Index (ERUS) and the SPDR S&P Russia (RBL).
|Fund||Ticker||Avg. Volume||Net Assets||YTD Return|
|Market Vectors Russia||RSX||3,939,640||$908.47M||-12.5%|
|iShares MSCI Russia Capped||ERUS||465,732||$305.67M||-10.98%|
|SPDR S&P Russia||RBL||47,984||$16.03M||-11.7%|
A few points immediately jump off the page. The RSX is substantially bigger and more liquid than the other options. Its assets under management are nearly three times bigger than that of the ERUS, and its daily trading volume is more than eight times bigger. Its performance year-to-date is the worst of the three, but the differences are minor.
I’m also inclined to lean toward the Market Vectors Russia ETF over the competitors because I consider the portfolio weights to be more reasonable. For example, Gazprom OAO (OGZPY) makes up nearly 21% of the ERUS and nearly 18% of the RBL. But its weighting is limited to only 9% of the RSX. Considering that and other huge overweights by the other two ETFs, the Market Vectors Russia ETF gives the best diversification of the lot.
But even with the best Russia ETF identified, should you buy into Russian stocks?
Well, they’re definitely cheap. By Financial Times estimates, Russian stocks trade for just 5.6 times earnings. Taking a longer view, looking at the Shiller Cyclically Adjusted Price/Earnings ratio (CAPE), you get a multiple of just 6.96 times earnings, making it the second-cheapest market in the world after Greece.
But then, Russian stocks are almost always cheap. That 6.96 CAPE valuation I mentioned is only slightly lower than the 8.51 long-term average for the country.
And while Russia still has a long way to go before it could be considered non-hostile to investors (let alone shareholder friendly), Russian stocks are boosting their dividends these days and making an effort to soften their images.
Ultimately though, a bet on Russia is a bet on energy prices, and that makes for an awfully short but (to me) convincing argument against right now.
Energy stocks make up 40%-50% of the portfolios of each ETF, so as energy goes, so goes Russia. However, non-traditional production has made the U.S. the world’s largest oil producer, and new oil and gas discoveries in Argentina, Brazil and the eastern Mediterranean (among others) promise to flood the globe with cheap energy for the foreseeable future
Thus, with a bet on Russian stocks being broadly a bet on Russian energy — which Russia has been known to use as a political weapon — it’s hard to see a catalyst here that will shake Russian stocks out of their perpetual cheapness.
Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Check out his new premium service, Macro Trend Investor, which includes a free copy of his e-book, The New Megatrend Investor: The Ultimate Buy-and-Hold Strategy That Will Make You Rich.
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