More Than Camaradarie

Those who follow BCM know that I’ve been watching Russian equities for some time.  In the past, I’ve joked that Russia has more to offer than just stiff vodka and camaraderie — but it’s true.   For example, Russia has vast deposits of natural resources including coal, timber, minerals, and natural gas.  A little-appreciated fact is that Russia is the largest oil exporter in the world.  That’s right, mother Russia exports more oil than any country in the Middle East.

And while Russia doesn’t get as much emerging market media coverage as India or China, let’s not forget that Russia is still the “R” in the “BRIC” acronym.  It’s a developing country with a long path of population and productivity growth ahead of it.  Though emerging markets are facing a slowdown at the moment, they still represent the long-term future of economic growth.

Be that as it may, Russian equities have been selling at attractive valuations — and in the wake of the unraveling debacle in Ukraine, they’ve become even more so.  At this point Russian stocks just look dirt-cheap, reaching low, single-digit earnings multiples.

Sure Russia has always had issues with corruption and political uncertainty.  That’s one of the reasons why Russian stocks generally sell at a lower earnings multiple versus developed markets.  That being said, geopolitical risk isn’t exclusive to Russia, but the increasingly attractive valuation is.

Again, there may be more downside from here, especially if tensions escalate with the West. However, by the time the smoke clears on this sideshow, it’s likely that the positive long-term highlights will remain.

Relative to what appears to be increasingly expensive equity markets all around the world, Russian stocks stand out as an uncommon exception.  Would you rather buy stock in a slow-growth, debt-ridden country for 20x trailing earnings, or in a financially healthy, “future engine of growth” for less than 5x?

Again, there’s really no telling what happens short-term and further price declines are possible for any number of reasons.  However, I’m watching developments closely and will be interested in building a long-term position on price weakness.

Victor K Lai, CFA

This blog is for informational purposes only. Nothing on this blog represents advice. Investing is inherently risky and involves the potential for loss. Victor Lai does not own any of the securities referenced in this posting. Clients of Bellwether Capital Management LLC may own shares of the securities referenced in this posting.