Russian stocks will be the buy of a lifetime. Someday. I’m not so sure that day is today, however.
The Market Vectors Russia ETF (RSX) has seen volatility this week that rivals the dark days of the 2008 meltdown. On Monday, RSX was down by 12%. And at the low point on Tuesday, RSX was down by 36% since the beginning of December…and down 57% year to date.
Interestingly, Russian stocks priced in their own currency don’t look nearly as bad. The Micex Index of Russian stocks is down a modest 11% this year and is actually up slightly since October. The real carnage has been in the Russian ruble, which is down 50% in 2014 and down 23% in the month of December alone.
So, a bet on Russian stocks is a bet on the ruble — which is in turn a bet on rising crude oil.
You follow that?
Looking at them in a vacuum, Russian stocks look like an absolute bargain, trading for just 6 times earnings. Taking a longer view, Russian stocks trade at a 10-year cyclically-adjusted price/earnings ratio (“CAPE”) of 5. To put that in perspective, U.S. stocks trade at a CAPE of 26.
That was the rationale I used when I went long Russian stocks this past spring. Russian stocks started the year cheap, and the Crimea invasion made them all the cheaper. I rationed then — as I did later during the Russian invasion of eastern Ukraine — that Western sanctions would be mostly toothless and that business would soon get back to normal. Russia’s President Vladimir Putin would resume his shirtless horseback rides and Ukraine would quietly fade from memory.
That sounded good. And then the oil crisis hit.
Russia could have happily extended its middle finger to the outside world indefinitely so long as energy prices remained high and Russian energy remained in demand. Even the fall in the ruble is something that could have been absorbed.
About 60% of RSX’s holdings are in energy and materials companies, and most commodities are priced in dollars — whereas most company expenses are priced in rubles. A weak ruble could have meant record profits had prices remained high.
The collapse of the price of crude oil changes everything. Russia needs an oil price of about $105 per barrel in order to balance its budget. With crude oil now priced at roughly half that level, Russia will need to start borrowing — at punishing interest rates.
In a failed attempt to defend the ruble, Russia’s central bank hiked short-term interest rates from 10.5% to 17% at 1 a.m. Tuesday. And almost depressingly, it didn’t stop the ruble’s slide.
You would have to be insane to buy the ruble, even after the rate hike, because there is no promise that you’ll be able to get your funds out. Putin has said that he would use “harsh” measures against currency speculators.
In the best case, that probably means capital controls are coming. And at worst? Who knows — this is Putin we’re talking about. Perhaps assassination with radioactive polonium-210 is in the cards for speculators.
I don’t recommend taking a significant long position in Russian stocks until the price of oil stabilizes. I sold my shares earlier this month. But in the meantime, I do think there will be plenty of short-term trading opportunities, both for longs and shorts.
I should emphasize that both of these are for short-term trading only. These are triple-leveraged ETFs and are completely unsuitable for long-term investing. But if you want to trade the day-to-day bends and twists, RUSL and RUSS give you high-octane exposure.
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