Investing in Russia today will likely result in significantly outperforming the established and costlier global markets for years to come.
Russia's gross domestic product has advanced 2.5% year-on-year in the second quarter of 2017, unrevised from the preliminary estimate and following a 0.5% percent growth in the previous period.
It has been the strongest rate of expansion since the third quarter of 2012, as output grew firmly for manufacturing, mining, construction, wholesale and retail trade.
Investors ran away from Russian stocks when the Russian recession started in 2014. Which is precisely what makes them so interesting at this time.
In 2014 the United States, Canada, France, and the European Union grouped together to place economic sanctions on Russia. Russia's market tanked, oil dropped, and investors withdrew over $152.5 billion from Russia's economy that same year. No wonder the Russian stock market and equity valuations took a sudden and sharp nosedive. That being said, much has evolved since then and the steps taken in commerce, industry and the government have succeeded in making Russia a far more efficient and smoothly productive economy than it was only a few years ago.
Investors are often lulled into following the crowd, or in the parlance of the market: “the thundering herd”. This herd mentality fuels and has fueled speculative bubbles, and panic driven flush-outs. When the dot-com bubble popped in 2001, investors saw their profits wiped out. The NASDAQ crumbled in March 2000, losing 77% of its value between 2000 and 2002. History and certainly the future has and will still witness rises and falls.
The Shiller P/E ratio – also called the cyclically adjusted price-earnings (CAPE) ratio – is a tool used to determine stock market valuations. Today’s ratio shows U.S. stocks are the most overvalued in the world, conversely it shows Russian stocks as being the most undervalued in the world. It is worth remembering that few investors make any serious money by trailing in the wake (and dust) of overexcited investment directions. Ideally, you want to get out and sell while there are buyers willing to buy, and conversely buy when there are no other buyers bidding the market higher.
Since skittish investors left the Russia stock markets, prices of many shares traded on the MOEX or Russia focused ETF’s in some cases are priced lower than their liquidated value. From an investing standpoint, that is by any definition the “sweet spot” for profitable market entry.
It is indisputable, given the emotionally charged positions many in western politics and media have talked themselves into, Russia is not the flavor of the month. History has shown investors repeatedly that when emotion rules the collective brain of any herd, it is time to take the contrarian position. In other words investing in Russia now will more likely than not result in significantly outperforming the more established and currently costlier global markets for years to come.
While Russia’s equities benchmark has declined 4 percent this year amidst a global rally, Russian companies have increased dividends and cut costs since the U.S. and European Union imposed sanctions. Russia is priced very cheaply for the growth it now delivers. Valuation is attractive. Corporate governance has improved tremendously. Companies are paying more and larger dividends, which has not been the case in the past.
The past three years have seen a lot of fat trimmed off Russia’s businesses, and this has continued with strong cost-cutting measures for the sake of efficiencies. Sanctions served to focus on what was important economically and to supercharge efforts that have resulted in lean, competitive companies and enterprises. The result is simple: As revenue grows the effects of that growth is amplified with a strong increase in earnings because the costs are lower.
When we look back with 20:20 hindsight at Russia in 2017/2018 and cluck to ourselves how could we have been suckered into the anti-Russia hysteria and “why didn’t I buy a few shares of this or that in Russia then?” By that time, the bellowing and stampeding herd will have bucked up the prices of equities by a substantial margin, perhaps to ensure what has now become tradition in the major markets - an overvaluation bubble. Hint: It may very well be that selling the Dow index at 23,000 levels and buying the MOEX might be the best move of the decade.