On 28 January I made the case that Russian equities were seriously under-valued. And for a while, the markets agreed. The main Russian index moved up a cracking 8% in just 5 weeks.
During that time, the major Western markets had slowed to a standstill. And the rest of theEmerging Markets (EM) had been hit hard. So that makes Russia's performance even more impressive.
But over the last week or so, things have taken a turn for the worse. That's why I'm looking at Russia again today. This sell-off has given us an opportunity for a great entry point.
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There are two big stories right now. One is the Middle Eastoil crisis. The other is the threat to the global nuclear industry, caused by the disaster in Japan. And they both mean that Russia just got even more interesting.
Today I want to show you a simple way into this market. This is too good to miss out on - and you can trade it easily through your regular brokerage account. Let me show you how.
Middle East turmoil puts Russia's political issues into context
When we last looked at Russia, the leper market, we saw two reasons why Russia is so hated by investors - dodgy politics and a dependence on thecommodities markets.
In the light of global events, let's put these exaggerations into perspective...
Okay, so we still live in fear of the strong-men in the Kremlin and their oligarchical comrades. There's something of a cold-war hangover going on here. But if the Middle East crisis has highlighted anything it's that the political risks are all relative.
As Westerners we've cosied up to all sorts of - how can I put it - politically questionable regimes. We've befriended and armed all manner of dodgy despot, or wealthy family heading up states of the Middle East that we consider strategically important.
It strikes me that we're on a sticky wicket here. Over the last decade or so, our armies have been blundering about these lands on a modern-day crusade. Spreading Western democracy' and liberating the oppressed'... but is this really what we're after?
I'm not so sure. The oil price has escalated ever since troubles broke out in North Africa. The markets are worried about democratic reform - especially if it comes to the House of Saud! Put simply, the oil markets may prefer to deal with despotic tyrants than risk the unknown entity that political reform may bring to the Middle East.
My point is that suddenly Russia doesn't look like such a political outlier. And if things deteriorate in the Middle East - suddenly we're going to start to get very dependent on the likes of Russia. Closer ties to Russia may alleviate some of those political risks.
And then, or course there's the other big story of the moment...
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Oil addiction just got worse
I'm talking, of course, about the Fukushima nuclear installation in Japan.
This awful story is still playing out. But already we know that this is a game changer...
I mean, whose bright idea was it to build a nuclear reactor in a high-risk earthquake zone? Surely they won't be putting these things back again. Japan is the third largest economy in the world - and it gets nearly 30% of its electric from nuclear. This is very serious for Japan. A move towards fossil fuels now seems inevitable.
Uranium stock prices tanked 40% in the light of the crisis - I think the market is trying to tell us something!
And we're not talking just about Japan here. Nuclear projects in China and across the rest of the globe are being re-questioned. I'd love to say that renewables can now take their rightful place at the heart of modern electricity generation - but it ain't gonna happen!
Nope... as of last week, the world has just gotten deeper into its fossil fuels addiction. And for Russia, whose stock market is driven by oil and resource stocks, things are looking good.
An investment trust that could be your best way in
Rather than going out and trying to build your own portfolio of Russian stocks, I think it's better to buy into a fund. And investment trusts, are a low cost way of doing that.
JP Morgan offers the only Russian focused investment trust and I've been keen on it for a while.
Investment trusts are companies that trade on the stock market, so you can buy them like any other share. The beauty of them is that apart from your broker costs, there are no other fees to pay to get hold of the stock. Management fees are taken directly from the trust itself and in this case amounts to 1.7% a year (total expense ratio).
Since the financial crash gave way to recovery, this trust has been firing on all cylinders. What a recovery in 2009/2010! Management raised the net asset value (NAV) of the fund by a staggering 215.8%, leaving the benchmark (up 153.9%) for dust.
Source: JP Morgan Russian Securities Factsheet
The fund has under performed its benchmark in two of the last five years (2011 and 2009) but I'm not too perturbed by that. On balance, management have done a great job. They tell us this is a highly concentrated, and aggressive portfolio' - and I don't doubt it for a minute.
Of course, this aggressive position' could leave the fund exposed if the markets take a turn for the worse. And that's exactly what happened during the last crash; 2009 figures show the NAV crashed by 75.6%, while the benchmark was only off 62.8%.
I like the fund manager's approach and I like their performance. If you want to find out more, you can go to JP Morgan: Russia website here, then click on the monthly factsheet' button on the right-hand side.
My advice: Don't be put off by politics and commodities dependence. In the light of the last couple of weeks, both of these problems' are starting to melt away.
With Russia's main stock index (the RTS) trading on a p/e ratio of just over 10 times it looks cheap. And this fund could be a great way to make the most of it.
Buy JP Morgan Russia Securities (LDN: JRS)
Here's a five-year chart of the fund's performance against its benchmark.
Source: JP Morgan Russian Securities Factsheet
Price: 672p
NAV (as at 17th March): 726.84
Ticker: JRS:LN
Total Expense Ratio: 1.71%
Annual Management Fee: 1.50% on total net assets
P.S. If Russia's outside your investing comfort zone, that's OK. I like looking for high reward potential sometimes, even if it comes with added risk. But I'm also just as interested in looking after my "conservative side". That's why I really recommend that report I sent you earlier from colleague Stephen Bland. It's poles apart from risky emerging markets plays -but it's got a great long-term track record of success on its side. Check out the email I sent earlier called "Make the market pay you" to see what I mean.
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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. Exchange rate changes may cause the value of underlying overseas investments to go down as well as up. Investing in emerging markets may involve a higher element of risk due to political and economic instability and underdeveloped markets and systems, and may be illiquid. 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.
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.
Managing Editor: Frank Hemsley. The Right Side is issued by MoneyWeek Ltd.
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