Russia and Putin won the Olympic medal count but lost Ukraine. Let’s call it a draw.
And right now, the Kremlin is struggling with political uncertainty, rampant corruption, weak productivity, and falling energy prices, all of which have hammered Russian economic growth and markets.
And can you believe it – Russia economy is the same size as Italy.
So why would anyone in their right mind invest in Russia right now?
Two reasons: When Russia’s stock market moves it really moves and it is the cheapest market in the world right now.
This may surprise you. Russia is the best-performing major stock market in the world for the period 2000–2013, when measured in US dollars against the major market indexes. It is well ahead of not only all developed markets, but also the markets like China and Brazil.
Now let’s turn to what the Value Bounce is always searching for – deep value companies and markets on the rebound. The Russian market is trading about 4.5 times earnings, significantly below other emerging markets and about 25% of the valuations of the S&P 500 index.
And as an American entrepreneur and investor who has made a bundle in basket case countries like Russia and Argentina put it to me this way: “to make money, it doesn’t have to get great, it just needs to get a little bit better.”
But Russia is also a good example of the challenges facing investors trying to tap into emerging market opportunities. You have limited choices.
There are a few mutual funds of course. Then there are four Russian companies that trade as ADRs such as Mechel Steel, Mobile TeleSystems, Rostelecom, and Vimpel Communications.
There are an additional 37 Russian companies listed over-the-counter. These “pink sheet” listings is a growing trend for even the largest companies like Gazprom and Lukoil eager to avoid the high cost and regulatory burdens of the big board. Picking through this list to find the “pink sheet blue chips” takes patience, skill and judgment. Be careful.
Then there are exchange-traded funds or ETFs that trade like a stock as a basket of Russian stocks. The highest profile is the Van Eck’s Market Vectors Russia ETF (RSX) with energy and basic material companies accounting for 68% of its assets. RSX has $4 billion in assets and 95% of the companies in the basket have a market value greater than $5 billion.
While RSX is a decent proxy, it is very top heavy.
I suggest you look at many smaller Russian companies that offer the following advantages over the better-known giants:
private ownership and control
Government ownership and support comes at a high price. Smaller private companies fly a bit under the radar. They also tend to be more nimble and have the opportunity to grow faster.
broader and deeper play on growth turnaround
Even marginal market reforms have and will continue to create winners outside of energy and commodities. The tax revenue from higher commodity prices filters back into the domestic economy sort of like a perpetual stimulus program. Smaller cap companies in a wide variety of industries are poised to capture this demand and turn it into profits for shareholders.
less research coverage equals “discovery” potential
Like small caps all over the world, Russian small caps are largely unknown and are covered by analysts only sporadically.
While it is difficult to invest in these Russian bear cubs, Van Eck’s Russia Small Cap (RSXJ) will get the job done.
RSJX offers good diversification with a 35% weighting in energy and materials, leaving more room for allocations to utilities (18%), industrials (15%), health care (8%), and other consumer (18%) sectors.
Try a double-barreled shotgun approach with RSX and RSXJ to take advantage of a dirt-cheap and unloved Russia.
Opportunity awaits,
Carl Delfeld.
Note from Midas Legacy Editor: We’re honored to have Carl Delfeld on our expert panel. Carl is founder of several financial organizations around the world, and he has advised the US senate and the US Treasury among many other large names. He is also the author of three investment books. Carl’s stock recommendation service, The Value Bounce, is the result of all his experience and research as he cherry-picks trades that allow you to have your cake and east it.
