by Charles Sizemore | March 18, 2014 1:00 pm
Call it the crisis that wasn’t. The Crimean referendum to secede from Ukraine and unite with Russia — which, by the way, it was a part of prior to 1954 — passed with a whopping 95% of Crimea residents opting for secession.
This guarantees that the Russian troops occupying the peninsula won’t be going anywhere any time soon — regardless of any threatened Western sanctions. Meanwhile, both Russia and Ukraine are mobilizing troops along their border.
No matter how this turns out, one thing is clear: political relations between Russia and the West are at the lowest point since the fall of communism.
Notice I said political relations. We may very well be entering a “cold war” of sorts in which Russian-Western official cooperation goes into deep freeze. The United States and Europe feel honor-bound to support Ukraine diplomatically. But both have too much to lose from antagonizing Russia too deeply. Europe needs Russian energy, and the U.S. needs Russia’s influence in Iran and Syria. My bet is that Russia gets a good slap on the wrist, and then we return to business as usual.
Mr. Market would seem to agree. Russian stocks rallied hard on Monday, and most world markets saw solid gains. So, how can we profit from the non-crisis in the Ukraine? Exchange-traded funds are a good start. Here are three ETFs to buy.
The first is obvious: the Market Vectors Russia ETF (RSX).
I should be clear: No one in their right mind would make a long-term investment in Russia. It’s a corrupt petrostate with no credible rule of law and, at times, an open hostility to Western free-market capitalism.
But while Russia is an awful investment, I consider it an attractive short-term trade, and there are some ETFs — like the RSX — that make it easy to do that. Russia is one of the cheapest markets in the world. By Financial Times estimates, its stocks trade for just 4.9 times earnings — earnings, by the way, that are already depressed by years of sagging gas prices.
Russian stocks generally sell at a large discount to other major markets due to the perceived risks involved, as rightly they should. But at less than five times earnings, they are now dirt-cheap, even by Russian standards.
I expect Russian stocks to enjoy a sustained relief rally that sees them rise by 20% to 25% over the next quarter. But, as I wrote in January, a bet on Russia is essentially a bet on energy prices.
And seeing how non-traditional production has made the U.S. the world’s largest oil producer, and how 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, a bet on higher energy prices is not one I care to make.
History buffs will remember that Crimea long ago was a vassal state of Ottoman Turkey. The Black Sea was once an “Ottoman lake” until Russia emerged as a great power in the 18th century. And more recently, Russia and Turkey were Cold War rivals. Turkey, as a Nato member, was the West’s first line of defense … which is a little ironic given the country’s lurch towards political Islam in recent years.
Suffice it to say, Turkey and Russia have a long history. And not surprisingly, Turkey’s market has been largely tracking Russia’s this year.
Not all of the volatility in Turkish stocks can be blamed on the Russia-Ukraine standoff, of course. In fact, most is due to Turkey’s homegrown political crisis involving a corruption investigation into prime minister Recep Erdogan’s family.
Still, as investors return to the region in the weeks ahead, I expect Turkish stocks to follow Russian stocks sharply higher. Like their Russian counterparts, Turkish stocks are among the cheapest in the world — trading for 7.9 times earnings by Financial Times estimates.
But unlike Russia, Turkey is no petrostate. It has one of the most diversified and well-developed markets in the emerging world. The iShares MSCI Turkey ETF (TUR) is heavy in the financial sector, but its largest non-bank holding is international mobile carrier Turkcell (TKC), a leading mobile phone provider in much of the Middle East and Eastern Europe.
I consider Turkey one of the most promising markets of the next ten years, and TUR is one of the best ETFs to buy if you want to profit on its strength.
And finally we get to Germany and the iShares MSCI Germany ETF (EWG).
Germany had a lot to lose from a confrontation with Europe. Of all the major European economies, it was by far the most reliant on Russian energy. Germany depends on Russia for more than 40% of its natural gas and about a quarter of its total energy supplies.
If the West were to punish Russia too heavily, Putin would no doubt retaliate by hiking gas prices. That would have been potentially devastating to German industry.
German exporters also do quite well in Russia. This week’s Economist noted that Germany alone accounts for almost a third of the EU’s total exports to Russia, and that German exports to Russia are worth more than $48 billion per year.
German automakers also do particularly well in Russia. Russian purchases of German autos rose 22% last year.
So, is Germany a buy? German stocks are not wildly cheap at 15 times earnings, and I see less upside here than I do in RSX or TUR. Still, I do expect German stocks to enjoy a nice rally and, at a bare minimum, to outperform U.S. stocks in 2014. So if you’re looking for ETFs to buy, EWG is a good alternative to U.S. options.
Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he was long RSX and TUR. 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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