“You can’t trust the Russians”, was the warning.
It came from a Moscow cab driver, delivered to our son, Henry. From our point of view, it was an unnecessary caution. We never trusted them anyway. Or the Chinese. Or the Democrats. Or wealth managers. Or General Petraeus. Or people from north of Baltimore or west of Hagerstown.
But what the heck?
You need confidence to buy Amazon. Or Google. Or Chipotle. You need confidence to buy a US T-bond, too. Or to let a contractor remodel your house on time and materials.
But Russian stocks are so cheap you don’t need to trust them.
Since 2009, the world’s central banks have put an additional $8trn into the global economy. But this flood of liquidity left the world’s biggest market (geographically) high and dry. In Mother Russia, the pie is on the ground.
Bloomberg gives a price/earnings (p/e) ratio for Russian stocks of 4.4. “4.4 is priced for a crisis”, says colleague Robert Marstrand.
And MoneyWeek’s editor-in-chief, Merryn Somerset Webb, adds that: “[Russian stocks are] cheap relative to everywhere else, and cheap relative to Russia’s own valuation history. Both measures are now much where they were back in 2008, and not far off half their averages over the last ten to 15 years.
“You will say that this makes sense. After all, who wants to pay normal prices for assets which are based in a very abnormal state? Surely, anything dependent on a slowing economy, that is in itself dependent on gas and oil, is to be utterly shunned? As is any investment that comes with the appalling corporate governance on offer in Russia.”
These are all perfectly good points. But there is cheap and there is cheap.
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At current prices, investors are practically pricing in the return of Stalin, says Merryn. So, we asked Henry to go to Moscow to have a look.
“Russian companies are very inefficient. And they work in a world that makes it hard to get things done,” he reports. “But you have to understand that they lived for 70 years in an economy that didn’t care about getting anything done. Output didn’t really matter.”
Before taking the capitalist road, Russians had an economy where, as one worker put it, “we pretend to work they pretend to pay us”.
We owe them a great debt. They continued their experiment with central planning for seven decades. It should have been obvious at the get-go that you can’t increase output by letting bureaucrats run your economy.
From the very beginning, real, useful output began falling in the Soviet Union. But, God bless ‘em, the Russians kept up with it until they had proved conclusively that their centrally-planned economy wouldn’t work.
Even now, the economy still suffers from serious problems, many of them the residue of the ‘Great Experiment’. In the ‘90s, the average Russian man had a life expectancy 20 years shorter than the average American.
And after the Berlin Wall fell, the Russian birth rate collapsed. In 2004, fewer than 11 children were born for every 16 Russians who died.
But progress has been made. A campaign to get rid of low-quality vodka seems to have helped men continue drinking longer. Now, male life expectancy is only 13 years below that of the US. And the authorities are working hard to try to keep their taxpayers from disappearing.
In 2007, for example, the city of Ulyanovsk organized a special ‘day of conception’. Workers were told to go home and go to bed. Those who had children nine months later received prizes.
Russia can be a tough place to do business. Businessmen, politicians and journalists often die under suspicious conditions. In 2003, the richest man in the country, Mikhail Khodorkovsky, was arrested. He spent the next ten years in jail, on what looked to many like trumped up charges. Recently, the Kremlin announced that he was being released.
Despite these things, money is money. Russian companies may be benighted and labour in a world of woe, but they make money and pay dividends. And you can buy these earnings at the lowest prices in the world.
Henry concludes: “I was sceptical when I first arrived in Russia, but I came away confident that there is a real opportunity in Russia to take advantage of this country while it catches up with the rest of the world. What’s great about Russia is that the earnings are already there – we don’t have to buy ‘pie in the sky’.”
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