Today S&P announced it cut the credit rating on Russian sovereign debt to junk status. The Russian equity market slid about 8% on that news, but the damage wasn’t as bad as some may have thought. That’s because the downgrade was widely expected, and of course, the Russian market is already down more than 60% from its highs in 2011.
I started paying attention to the Russian stock market in 2013 due to what seemed like attractive valuation. Russian stocks were already down 40% at the time and were trading at single-digit earnings multiples. Since then it seems like anything that could go wrong has done just that. Military conflict, social unrest, economic sanctions, plummeting currency value, free-falling oil prices, and now a credit downgrade to boot!
So what else could possibly go wrong? I think the answer is just anything and everything at this point. Outright war, depression, and a political coup are a few things that still haven’t popped off yet. And if they do, I think further price weakness is certainly on the table. All that being said, I have no idea when Russian stocks will bottom, and regardless, market-timing isn’t my forte anyway.
Instead, I do my best to ignore the blinking lights and focus on the big picture. As I’ve said from the start, my long-term outlook for the Russian economy and its stock market is positive. Russia continues to be a key emerging market and a driver of future global growth. From that perspective, I liked Russian stocks at -40%, and I love them at -60%.
There’s no telling what kind of unexpected scares, risks, and volatility lay ahead for Russian stocks. But my guess is Russian stocks picked up at today’s prices will eventually look like a great bargain — after all the smoke settles that is. As always, practice prudence. On anything speculative like this, don’t bite off more than you can afford to lose. And if you’re going to build a position, do it over time on price weakness, and as part of a properly balanced and diversified portfolio appropriate for your needs.
Victor K. Lai, CFA
Disclosure: Victor Lai is long ERUS. This blog is for informational purposes only. Nothing on this blog represents advice. Investing is inherently risky and involves the potential for loss.