Russia ain’t pretty – but it’s tempting

I’ve written here several times this year that if you think it makes sense for long-term investors to buy cheap stock markets over expensive stock markets, it makes sense to buy Russia.

This hasn’t looked particularly clever in the last few months: Garry White, writing in the Telegraph points out that net capital outflows from Russia reached $75bn in the first part of the year, while the stock market is down 20% since the end of last year.

If it was cheap before, much of the market is even cheaper now. Gazprom (which, says White, has “the world’s largest oil reserves”) is on a price/earnings (p/e) ratio of 2.7 times. Rosneft is on 4.4 times.

There is, of course, the possibility that these prices still aren’t cheap enough. Given how much there still is to worry about (war, sanctions, inflation, collapsing growth, etc), White worries that Russia might end up being a classic value trap rather than an improving market to catch on the cheap.

He could well be right. But we still find it almost impossible to resist the prices. On a forward p/e of a mere four times, the Russian market is, as Oriel Securities put it, “one of the cheapest markets on the planet”.

In a world where investing is mostly about choosing between markets suffering from varying degrees of overvaluation, finding anything that is objectively cheap is interesting.

Oriel reckons Russia “may offer opportunity” for contrary value investors. We aren’t yet totally convinced that now is the time to add too much to your Russian holdings (see our recent cover story on the matter), but those who are feeling optimistic and brave might roll the words “cheapest market on the planet” around in their head for a bit and consider buying a little for the long term.

I’m hanging on to my holding in JPMorgan Russian Securities (net asset value down 22% since last November) and Oriel suggest adding Blackrock Emerging Europe (down 16%)  – a trust which is over 50% exposed to Russian and Ukrainian equities.

  • Boris MacDonut

    Time is against Russia. It made the wrong choice 20 years ago.To give up trying to catch the west technologically and to cash in its raw material wealth like a developing nation. Russia has two fundamental weaknesses, its borders and its demographics. By 2040 there will be fewer than 100 million in this vast territory, so widely spread it will be difficult to even call it a country. The politiking we see is mistaken for aggression but it is a defensive fear of permeable borders. Russia will collapse again within a decade.

  • Clive

    might want to listen to

    I seem to remember Meb Faber,while talking about cheap vs expensive countries, saying Russia had been cheap a while back….and then got cheaper still !

  • Justin

    Don’t believe all of the Western propaganda. Russia is the largest energy producer in the world and the ruble is a petro currency backed by oil and gas. Increasingly they supply that oil and gas to the largest energy consumer, China and other Asian countries. On 18 August, Russia announced it is letting the ruble float and the currency has been rock steady over the last couple of days. The strength of a currency is a sign of the strength of the economy. The ruble is much stronger than the Euro. Also, Russia, like other Central Banks in the East, has been steadily accumulating gold, so the ruble is increasingly backed by gold. Russia has very low public and private debt, unlike Western countries. Have a read of this:

  • Boris MacDonut

    I agree with Justin ,Russia is superficially strong finsncislly in the short term, but it is ruined demographically. Anyonevwith money is leaving, life expectsncy of only 62 for men. Losing 42 million population in the next generation. It is fragmenting ,aging fast.

  • Rags to riches

    Contrary to what Boris says Russia has a strong future. It has huge resources that the rest of the world desperately needs, and as Justin says, the currency is rock solid.
    Ukraine is going to have to make up its mind whether it is with Russia or a poor relation within Europe/EU. The ideal solution culturally and geographically is that the country splits in two but the west would not agree to anything as democratic as that.
    Russia and China will create a third force both financially and geo-politically that will have the potential to surpass both America and Europe.
    Russia is a great country and will become more desirable in future years.

  • Boris MacDonut

    Rags. I agree that Ukraine has some hard decisions to make.There has to be some sot of buffer between Russian and Europe. However the card are stacked in Europes favour. The World leaders are technologically and industrially advanced. Russia just sells minerals like an African failed state. Russia is a disaster waiting to finish happening. Selling Oil has delayed the inevitable eclipse.

  • Justin

    Another point worth mentioning. I suspect that Russians can put up with more economic hardship than people in the West. The Achilles Heal of the West are the astronomical debt levels, weak economy and a culture of high expectations that are becoming increasingly difficult for most people to attain (the so called, American dream, now gone rotten with the 1% versus the 99%). Most Russians and other people from the East do not have these handicaps and could be better able to cope with a long period of economic sanctions. Food for thought.

  • Boris MacDonut

    Justin. Russia does not have a 1%. It has a 0.01% who own about half the wealth, and hoard it abroa in Cyprus, Switzerland and London. A recipe for massive resentment.

  • Justin

    My point is that most people in Russia and the East do not have the same high materialistic expectations as people do in the West. This could mean that they are better able to cope with economic hardship caused by sanctions.

    The minerals, oil and gas sold by Russia will always be in demand, so I actually see that as a strength not a weakness. Technology would really struggle without the minerals and energy required to make the devices work! So, on a fundamental, value basis, maybe Merryn is correct about Russia.

  • Justin

    I’ve just heard that, as a result of sanctions, Russia is now trading oil completely outside the US dollar reserve currency system. In rubles to Europe, in yuan to China. As a protective measure, Russia decided to avoid making its payments in US dollars, which can be tracked and controlled by the United States government, Kommersant reported.

    This is highly significant news.

    Attention: This could be the first “nail in the coffin” of the U.S. dollar

  • IJ1

    i don’t know how many times i’ve mentioned it by now, but you can’t trust the Russia p/e. it’s dragged down massively by oil and gas p/es, but those are fake as D&A is understated. you need to look at free cashflow multiples. it’s not cheap on those. That combined with sharply deteriorating fundamentals for oil and gas doesn’t bode well, not to mention that the place is run by a madman and his inner circle of kleptocrats whose claims on an ever-shrinking pie leave less and less on the table for minority shareholders. It will be possible to make a lot of money in Russia again at some point. But i fear that both the time and price may be some way off. As far as i’m concerned, it’s uninvestable until there is regime change, which is bound to be a very ugly process. Wait!