Why I like the world’s most hated market

I find it amazing how I can often flick from the ten o’clock news on the Beeb over to ITV, with barely a flicker of change in the story line. How on earth do the editors end up with exactly the same running order on the world’s wide and varied news?

I guess there’s some sort of a formula the mainstream media use. Something that tells them exactly what constitutes public interest.

But this inadvertent censorship leads us into a deeply skewed perception of what’s really going on in the world. There’s a whole plethora of stuff that simply doesn’t reach the public at large. And when it comes to investments, a lot of the stuff that nobody’s bothered about really matters.

Because I think one of the biggest stories of our lifetimes is playing out in Russia today…

A currency to replace the dollar?

Over the last twenty-odd years, the world order has changed.

The two countries that really encapsulate what I’m talking about are Russia and China. This week, the newly installed Chinese premier, Xi Jinping, went walkabout.

As leader of what is now the largest trading nation in the world, his first job wasn’t to bang on Obama’s door, and he certainly wasn’t heading off to the next biggie – Japan! I suspect our own leader is quite a way down the pecking order too.

Jinping’s first official visit was to Moscow. And that says an awful lot about the new world order.

Russia and China have a lot to discuss. China is the world’s manufacturing hub and Russia has a whole stack of commodities – everything China needs to make the world’s bits and bobs. Putin and Jinping are discussing gas supply pipelines across Siberia, liquified natural gas (LNG) contracts and all manner of other partnerships and trade deals.

These guys no longer need to plough all their dealings through the established international markets. They want to go it alone. Now, I don’t know, but I suspect they’re even considering ways of bypassing the traditional dollar-based trading system.

Why on earth would these emerging titans want to be held hostage to the US and its dollar regime?

To my mind, the big story is unfolding behind the scenes. Russia has doubled its gold reserves over the last five years. China too is on a gold buying frenzy – though they don’t release official figures often – there’s strong evidence to suggest they’ve been loading up significant holdings over recent years. Why? Well, I suspect they’re making plans for the next international trading currency.

We’ll have to wait and see about that. But the point is, we in the West don’t seem to care. If you want your investments to succeed, then you’d do well to ignore the Western news bias and get stuck into what looks like a fantastic growth market. And it’s probably the cheapest market in the world…

Russia trading on six times earnings!

I know that a price/earnings (p/e) ratio isn’t the be-all and end-all. But it’s a pretty good way of assessing value – and certainly a great way of comparing investments across the board.

Remember, a p/e ratio tells you how many years it’ll take to get your investment back – the lower the better. Now, you may well think that because everyone seems to hate continental Europe right now, that it’d be on a low p/e, right? Wrong.

Spain is trading on 13 times earnings. Heck, Greece and France are on 15 times! These valuations are far from cheap, but in what way do these stock markets represent the risk of a serious European blow-up?

And then I look at Russia. The RTS, Russia’s stock exchange, is trading at six times earnings. Yes, that’s right. A country where economic growth knocks the socks off the West. At this point I want to break into Millwall Football Club’s chant, “No one likes us… we don’t care!”

I know Western commentators don’t like Russia. Oh, the corruption, oh, the tyranny… Putin, his cronies and oligarchs, blah, blah, blah. And most investors like to ignore Russia. Well, I say, more fool them. It leaves the market trading so cheaply, it’s ridiculous.

I have in the past suggested a couple of ways of getting exposure to Russia. I discussed Russian landlord Raven Russia’s preference shares. With a yield of over 9%, they were a good buy. The shares have gone up a bit since I mentioned them, but the yield is still over 8% – not bad in this day and age.

The other on Russia was JP Morgan’s Russian investment trust. Its performance has been up and down. Right now, the trust is trading at a 10% discount to its net asset value.

To my mind, that just about sums up how we look on Russia. The cheapest market in the world, and you can buy its stock, right here in London at a 10% discount!

I don’t want you to go flying in feet first. So next week, I’m going to run through this fund in more detail. I’ll show you why I think it’s worth a look.

• This article is taken from the free investment email The Right side. Sign up to The Right Side here.

Important Information
Your capital is at risk when you invest in shares – you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. Past performance and forecasts are not reliable indicators of future results. Commissions, fees and other charges can reduce returns from investments. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.

The Right Side is an unregulated product published by Fleet Street Publications Ltd.

Fleet Street Publications Ltd is authorised and regulated by the Financial Services Authority. FSA No 115234. http://www.fsa.gov.uk/register/home.do

15 Responses

  1. 01/03/2013, Bapodra Investments wrote

    Bengt,

    How you can even mention investing in Russia without mentioning Neptune’s Russia and Greater Russia fund? Robin Geffen is the fund manager and this fund has performed rather well recently. Yes it is a high risk fund but if you are looking at investing in Russia then this fund is as good as JP Morgan Russian Securities. Look I am now doing MoneyWeek’s job for them so please provide more information to readers when publishing articles like this. Also there Russia ETF’s as well.

  2. 03/03/2013, Derek M wrote

    Hi Bengt

    I am interested in the preference shares in RUSP. However, I believe these are redeemable, but you make no comment on this, or the probability and outcome if the company were to invoke this.

    Best regards

    Derek

  3. 03/03/2013, bengt wrote

    Derek

    The terms of the prospectus (http://www.ravenrussia.com/pdf/20110721Preference_Share_Prospectus.pdf) say that the stock can be redeemed in the case of a merger/takeover.

    But insiders have a fair few of these pref’s – I expect they’d want to see fair play. If they were redeemed, it’s true, you’d make a capital loss. So yes, one shouldn’t bet the farm on any on this stock. But as part of a diversified income portfolio, it has a place

    bengt

  4. 04/03/2013, MichaelL wrote

    I have the Neptune fund, one thing about it – its a managed fund , as such, I’d expect it to maybe not follow Russian index (like the capped ETF HRUB.L) with energy weighting as much as it currently does – there must be bargain stocks in Russian supermarkets etc…

  5. 04/03/2013, Changing Man wrote

    o have this allocation but find it very difficult to read the Russian market. Seems to follow the European markets but is also affected by gas/oil prices?

  6. 04/03/2013, IJ wrote

    As someone with a fair amount of experience in Russia, I immediately see some points that may need clarification. A bit like the country itself, Russia’s stock market is a bit of a paradox. On the whole, it is indeed cheap. However, the “whole” is as you know heavily weighted towards oil and gas. Therefore, the global energy sector may be a better comparable than country indexes. The case then becomes less compelling. Are Gazprom, Lukoil etc better investment than Total, BP…? To me it’s not straightforward. Russia is still on a discount, but a significantly narrower one (Total, BP et al are pretty cheap too). And it may well deserve this, not just because of corruption, poor management etc. but also severe structural problems, particularly for Gazprom.

  7. 04/03/2013, IJ wrote

    cont… So, many active Russia-dedicated managers sell Russia to clients on the grounds of the low p/e but then shun oil and gas for other sectors with stronger management teams, better operating momentum etc. But in some cases these stocks really aren’t that cheap, at least not on P/E. The most extreme example, and I’m sorry to disappoint MichaelL, is a supermarket chain that is extremely well run but as a result a “must-own” stock trading at 25x p/e or so. This is by no means an attempt to diss Bengt’s article. No doubt Russia does represent good value at current prices. However, the low P/E may not be entirely unjustified and the pricing of Russian assets (and let’s not forget this is a fairly mature market by now) may not be as inefficient as we think.

  8. 04/03/2013, Joe wrote

    Michael L Russian supermarket chain Magnit (MGNT.LI) worth a look. But having risen some 150% n the last 18months and on a p/e of +20, it’s not looking so cheap any more

  9. 05/03/2013, MichaelL wrote

    Thanks for the info re: Magnit – Just checked Magnit p/e seems to be 27.63 (well according to Bloomberg) this is not cheap. I guess it is relative – its not as expensive as say Amazon… I suppose value investing in Russia may have got a lot harder and maybe requires someone based in Russian and able to phyicaly check up on companies.

  10. 06/03/2013, Colin Selig-Smith wrote

    I’ve been looking at Russia for a while, but haven’t decided on a vehicle.

    Any reason for this particular funds (apart from the discount) and not say the most liquid or lowest fee MSCI index tracker? Bloomberg have a list of funds for various countries including Russia.

  11. 07/03/2013, JREwing wrote

    The best play of all would be to buy farmland in Russia but how on earth do you do that as a foreigner? Farmland in Russia is still probably the best asset of all to own from a price to likely aprreciation point of view.

  12. 08/03/2013, Poutine wrote

    Russia is hated because the oligarchy hates its recovery. Huge country, very good education, proud of its nation, christian and resilient to globalisation.

  13. 08/03/2013, Poutine wrote

    @JREwing.

    You have a share on Nyse/Euronext Paris

    AGROGENERATION : ALAGR.

    Holds farmland in Ukraina and Argentina

  14. 11/03/2013, Jim wrote

    Raven Russia’s ord shares is the name of the game these days.

    63% up on profits and rising!!

Commenting on this article closed

MoneyWeek magazine

Latest issue:

Magazine cover
Heading higher?

Or are house prices set to fall?

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues

'Would you rather upset God, or have Him just ignore you?'

In the first of three interviews with Merryn Somerset Webb, Hugh Hendry, manager of the Eclectica Fund, talks about what it takes to be a good hedge fund manager – and how he learned to stop worrying and love central banks.


Which investment platform?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from. They all offer various fee structures to suit individual investing habits.
Find out which one is best for you.


26 November 1703: Britain hit by the original 'Great Storm'

Town and country were left devastated, hundreds of ships were lost and thousands died when the worst storm in the history of Britain reached its peak on this day in 1703.