“You make more money when things go from truly awful to merely bad,” says Arjun Divecha of asset management group GMO, “than when they go from good to great.” So value investors should be eyeing up Russia. Its “relationship with the world is now approaching truly awful”.
Since 6 April, when the US announced a new round of sanctions against Russian individuals and firms, the rouble has had its worst week against the US dollar since 1999, losing over 7%. The RTS stockmarket index slumped by 11% in a day; and the yield on government bonds has leapt by over 0.5%, reflecting sliding prices. Even before the slump, Russian assets were cheap. Stocks were on a forward price-earnings ratio of 6.5, compared with 12.5 for emerging markets as a whole, says Steve Johnson in the Financial Times.
The economy is recovering
The fundamentals, moreover, looked mildly encouraging. After a recession and jump in inflation, the central bank had got price rises under control, facilitating a long series of interest-rate cuts. These spurred a jump in bank lending, underpinning growth and allowing Russia to regain its investment-grade credit rating.
Nonetheless, the economic recovery is far from spectacular: the International Monetary Fund has forecast annual growth of just 1.7% in 2018, and there is no sign of structural changes – such as reducing the role of the state – that would raise the economy’s speed limit. The latest slump in the rouble could prevent further interest-rate cuts, says Johnson, which would crimp growth.
But the bigger problem is that geopolitics are now the main influence on stock prices, and this is fraught with risk. Washington has now imposed secondary sanctions on various Russian companies and people, so non-US individuals and firms doing business with the sanctioned firms and people face the same penalties as Americans. This implies that “several Russian entities and businessmen long serving as conduits for Western investment into the country now face crippling restrictions on their reach in international markets”, says Natasha Turak on CNBC. “Anyone could be next”, and the upshot is that Russia’s markets “now appear at the mercy” of the United States Treasury.
If this stand-off goes on, Russia could become a total pariah state in investment terms, says Rob Marstrand on Seeking Alpha. How long will it be before the US and UK ban all trading of Russian stocks and bonds? On top of all this we have the usual problem of a capricious Russian state, which on this occasion may attempt to punish foreign investors or seize their holdings to top up the coffers. Russia may be cheap – but that certainly doesn’t make it good value.