Russia may be unpopular… but it’s bloody cheap

Russian stocks: ‘like a coiled spring’

I’ve taken a keen interest in the ongoing Russia/Ukraine affair, not least because I’m keen on Russia’s investment case. Of course, unbiased intelligence on the conflict is thin on the ground. I’m taking most things uttered by all factions with an extremely large pinch of salt.

But one thing you can’t get away from is the fact that the West has got it in for Russia; and as far as the market goes, that’s been far from beneficial!

Now, don’t get me wrong. It’s not that I’m particularly enamoured by the ‘Russian way’. But I’m not very keen on the Western way either. Western economies are built on very shaky credit foundations, and as we both know, stock valuations are propped up by central bank manipulation.

Russia’s economy, on the other hand, is built on the solid foundations of oil and commodities. That’s exactly why Western leaders are muscling in on the local power-broking in this part of world.

And as far as Russian stocks go, at least they’re not manipulated by central banks. Trading at around five times earnings, the only thing propping up Russian stocks is fundamental valuation.

And it’s utterly fascinating for me to see that, despite the severe anti-Russia rhetoric coming out of the West, Russian stocks haven’t really fallen that much.

The oil market on steroids

The following chart goes back to the dark days of 2008. The blue line plots my favoured Russian investment trust, JP Morgan Russia. As you can see, the market is certainly down over the recent times. But not quite has much as you might have expected, given the circumstances.

Emerging markets have been out of vogue for well over a year. It’s as if the Ukrainian situation just exacerbated what was an existing problem.

JP MOrgan Russia fund v Brent Crude oil price

I haven’t plotted the absolute price of the Russian fund. Instead, I’ve used Brent crude, the pink line, as a comparator.

People often say that the Russian market is a proxy for the oil price. But really, as we can see on the chart, it’s more like the Russian market is oil, but on steroids!

Russian stocks will have a lot of catching up to do

The thing is, recent jitters have sent my favoured Russia fund right back to square one. Although the oil price has stabilised at a relatively high $109, this Russian fund hasn’t benefited with its usual steroidal surge. And we all know why that is.

At times like these, market participants get very nervous. They fear for the worst. And I guess, in many ways, so they should.

But then again, geopolitical tensions with Russia have a way of working themselves out. I don’t want to downplay what’s going on in Ukraine, but I think there’s an awful lot of sabre-rattling and rhetoric obscuring the real situation.

It will blow over (famous last words), and when it does, Russian stocks are going to have a lot of catching up to do.

The main reason Russian stocks haven’t fallen further than they have, is that they were so cheap to start with. They are like a coiled spring. So close to its compression limit, it’s very hard to squeeze any more energy into it.

That sounds like a good time to buy to me.

Some say “buy when there’s blood on the streets” – and although it’s unfortunate that the metaphor is so uncannily apt right now, it may not be a bad cliché to keep in mind.

Only time will tell.

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6 Responses

  1. 23/04/2014, dlp6666 wrote

    I think you’re much too optimistic.

    The Russians seem to have proved themselves as people who can practically at a whim just unilaterally confiscate something that they want for themselves.

    Crimea is just one example of several.

    They could confiscate some of the companies held in the JPM Morgan fund.

    And confiscated companies are worthless to investors.

    I’m looking at what’s happened to your other tips (AGTA, CPBA) and sorry, but am very wary.

    Definitely a VERY contrarian play.

    • 25/04/2014, Warun Boofit wrote

      I bought CPBA last year after reading bengts second article , total return if I were to sell today 30% including dividends which even with the higher bond price is yielding over 10%, its a good one for an ISA. CPBA was a wall of worry at one stage looking like it could be a complete loss . I find Paul Flowers and the incompetant coop bod to be more scary than Putin. In both cases these bogeymen are what can help make a profit in the long run. These days I look out for potential bogeymen on the bods of otherwise good companies, I have a lot to thank them for.

  2. 24/04/2014, Oscar Foxtrot wrote

    A classic contrarian play – and very appealing for that reason. The current price offers a discount to NAV of over 9% with a dividend of 3.28% (although by no means guaranteed of course).
    With geo-political events as they are the price may well fall further. I am tempted to put in 2% of my portfolio with a view to holding for 10 years+.

    • 24/04/2014, Arkiruthis wrote

      Likewise, for a small allocation (your 2% sounds right) I would also be tempted. Whilst Russia is risky, I’d be surprised if they confiscated every holding in the JPM Russia fund. The JPM Russia also looks like its holdings are a bit more spread out than, say , iShares MSCI Russia (with a 21% holding of Gazprom).

  3. 24/04/2014, IJ1 wrote

    you said exactly the same in January or February when Russian stocks were about 15-20% higher. Why no mention of that? Granted, Russian shares are cheap. But Russia’s “solid foundations” (i.e. oil production) are declining. During the commodity boom and Russia’s huge bull market from 1998-2008, Russian bureaucrats could get rich owning stock in state and quasi-state (i.e. most) companies. But now that the economy is stagnating and investor enthusiasm dampened, they have to steal more from cashflows to fund their expensive lifestyles. So in short: peak profitability + more stealing = an ever diminishing pot available to minorities. It’s a vicious circle. Hence, Lukoil’s measly dividend of 3%. So what if it’s 4x p/e. I’d rather own Total. As for other poor calls, i’m looking forward to an update on your long google / short apple pair.

  4. 21/05/2014, Pinkers Post wrote

    Cheap??? Russia has never been more expensive. GET ME OUT OF THERE! http://pinkerspost.com/post.php

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