Late last year, I recommended investing in one of the most hated, dirt-cheap stock markets in the world – Russia.
After struggling for a bit, my three plays on Russia have taken off thus far in 2016 – up 21.8%, 31.4% and 41.8%, respectively. Meanwhile, the S&P 500 Index is up only 3.4%.
This Russian rebound reaffirms my belief that, for a value investor, price has to be the starting point. Any stock market selling significantly below its book value is a great opportunity.
But despite these moves in the right direction, Russia, surprisingly, remains perhaps the cheapest market in the world – and an impending geopolitical move by the West could lead to Russian stocks taking off like a rocket.
Before we delve into the reasoning behind the stagnancy of the Russian market, let’s review a few key factors.
First, this idea is speculative so make sure to proceed with caution and do not go overboard with immediate investments.
Second, the Ukraine issue is serious, but after the dust has settled a bit, it is probable that U.S.-Russia relations will improve. The stakes are simply too high, and the logic of some sort of rapprochement is too clear and convincing.
After all, the last thing the United States wants is to do is push Russia and China together.
So, while headlines have created the perception of a crisis in U.S.-Russia relations, the reality is that diplomats on both sides are working hard on what is referred to in diplomatic circles as, “alliance management.” One emerging bond trader who is active in Russia explained it to me like this, “A lot of this is elaborate political theatre.”
What to Expect
When most investors think of global growth investing with close attention to price, they think of Sir John Templeton.
Templeton is indeed a legendary figure, for having the courage to jump with both feet into deep-value opportunities.
But don’t forget who has led Templeton’s efforts in emerging and frontier markets over the past three decades – Mark Mobius.
Mark has had a hand in dozens of successful funds and is a canny stock picker as well as a keen observer of geopolitical trends.
This is what Mobius said in a recent Bloomberg interview about the cheapest market in the world:”[Russia] has been closed to us and many other investors, for the most part, because of (economic) sanctions…If sanctions are lifted, then you could see a big, big surge in Russian stocks.”
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Could this happen? The U.S. and Europe have had these sanctions in place since early 2014 after Russia seized Ukraine’s Crimea region. But now, even U.S. Secretary of State John Kerry seems optimistic that there will be a total ceasefire in Eastern Ukraine paving the way for those sanctions to be lifted.
Kerry was quoted, optimistically positing that, “I believe that with effort and with bona fide, legitimate intent to solve the problem on both sides, it is possible in these next months to… get to a place where sanctions can be appropriately… removed.”
Here’s the main reason I recommend pulling the trigger on Russia right now –whether or not the sanctions are lifted, even after the surge so far this year, Russia is still incredibly cheap.
The VanEck Vectors Russia ETF (RSX) is trading at just seven times earnings.
Lukoil (LUKOY) – one of the largest oil and gas companies in the world with total proven reserves exceeding even Exxon Mobil – trades at just four times 2016 earnings with a 6% dividend yield.
And the VanEck Vectors Russia Small-Cap ETF (RSXJ), even after a 41.8% jump so far this year, is trading at just 4.5 times earnings.
Put some mad money in these Russian picks with a 15% trailing stop loss to protect your downside.