Russian equities

As we all know just about everything is expensive right now except…Russian equities! Market Vectors Russia ETF (RSX) is around 6X P/E, Gazprom is around 3X; a first glance over their financials and they don’t look like a disaster. Russian isn’t going to vanish; they produce energy and the world needs energy. Yeah there might be some disruptions/volatility while they adapt to changing conditions. So what’s the deal? Valuations are the LOWEST of the emerging markets (see Blackrock EM tool below). Is this because the West has emotions about the Ukraine thing, or based on solid analysis? http://www.blackrockblog.com/blackrock-emerging-market-marker/

Prob some combination of Putin’s intransigence, the Ukraine situation, and a plummeting ruble.

Yeah, the currency thing, good point. That happened, and no doubt contributed to why things seem cheap now. I guess the important question is, where is the currency headed? Their central bank just raised rates. Any currency wizards have thoughts on this? I’ve never really looked at this region, so in the process of getting up to speed…

In Soviet Russia stock shorts you…

I like LUKOY and CTCM, bought LUKOY but decided that holding a oil company in a time of struggling oil prices and a russian one to boot was going to be pretty stagnant for a while…CTCM I still like but you have to take into account the 15% tax witholding for divs. SBERCY and OGZPY heard good things about.

Thanks, I’m going to add the names you mentioned to my list to research.

Speaking of Gazprom, I find the exchanges/tickers/currency chaos confusing when trying to get up to speed on international stocks. Bloomberg says GAZP:RM is up slightly at 144 RUB (I assume this is the real stock). Meanwhile OGZPY, some pink sheet weirdness, is trading significanly down today at $6.22 (291 RUB). And the stock also trades on the LSE and SGX under yet more tickers, and more weird prices, which don’t seem to reconcile to each other.

With Interactive Brokers I think I could trade on the LSE or SGX, but I’d have to buy live quotes for those exchanges first, unless I wanted to trade blind. It’s weird that in 2014 it’s difficult to buy massive names like Samsung and Gazprom.

whats next, you gonna be buying north korean equities?

Well, your location is listed as Ukraine, what do you think about the whole thing? Take CTCM, I don’t follow the company but first pass – media/TV (unrelated to the whole energy deal), was trading at $12 prior to the whole Ukraine nonsense, now at $6. Price 6X earnings. And dividend yield at an impressive 11%, which offers some income even if you get beat up on price/fx. Seems reasonable to at least look at these things.

If you can hedge the currency and hold for 5 years then I’d say it’s a no brainer.

There is certainly an ethical dilemma I would face investing in companies that directly support asshats like Putin. Sure, the prices look good but I’m not putting capital, however small, into that mess.

particularly, the prospect of Putin expropriating Western, or total, ownership of Russian corporations is pretty risky considering we keep hammering him with sanctions and he apparently wants half of Ukraine. Russia’s negative economic growth rate, declining population growth, unfavourable business policy and potential for near-term economic collapse are further issues. add to that the fact that Russia is now tied to China, and the picture doesn’t look too rosy there as well.

Russian Equities have had low PE ratios for a long long time. It’s pretty much about country risk. The government might nationalize your company if it’s considered strategic (i.e. excessively profitable), transparency is poor, cheating and lying on financial statements is a way of life and the only bad thing is getting caught, foreign investors have subordinate rights to domestic investors (except perhaps when it’s a way to eliminate a political contender). All of those have pushed PEs down in Russia, and they always seem so low that they can’t possibly be a bad call. Entire countries don’t go bankrupt, after all, even if their governments can, and Russia’s government doesn’t look like it’s going bankrupt anyway.

But look at the Russian ETFs, like RSX. Over the past 5 years, it’s pretty much down, down down, with some seasonal-looking ups and downs. The 3.6% yield looks interesting, until you factor in things like “Down 25-30% YTD, following several more years of down YTD”. You could have said, “A PE like that has got to have a great margin of error,” but you would have been wrong. Very wrong. If the PE were totally unjustified, you would have seen correspondingly high returns coming from it as a reward for those brave souls who saw the opportunity and siezed it.

At some point in the future, the equities market is likely to bounce and grow, and naysayers are going to look dumb. But that future could well be a decade away, and likely will involve significant political transformation in Russia.

I hold YNDX. Fundamentals are strong and I’m willing to hold the stock until the Ukraine crisis has passed. The currency aspect is very important, ideally I would hedge this going forward as further weakness in the Ruble is expected as they head toward a free-float against the dollar. Watch oil prices as well, obviously Russia’s finances are dependent and a sustained rally in the price of oil would be very beneficial.

If you’re looking at making a large investment you should read this article from the New Yorker. It’s quite long and starts off pretty slow, but the story is that Putin has become a much different person than he was his first time around as President. He is no longer the pro-business politician, rather a very religious and nationalistic person who wishes only to be seen as strong by his own people. If this story is accurate, we can expect more situations like Ukraine to occur in the future which would obviously be a negative for Russian Equities.

http://www.newyorker.com/magazine/2014/08/11/watching-eclipse

Yea, BChad beat me to it. How are you valuing the risk of giving your money to the Soviet cause for free?

CTCM does deserve another look now that I think about it. Seems that its producing average 145M CF on an EV of 815. Even if you back out a 15% tax we get 123.25/815 = 15%.

so glad chad posts here

Yeah, this all adds up. Thanks. For non-US I’ve been looking at Philippines, Indonesia, Korea and Japan. Going to keep RSX on my watch-list; I don’t care about morality, but some of the country risk and anti-foreigner stuff is creeping me out. Plus as you point out – it’s gone nowhere in 5yrs.

When I was reseaching this name; it came up that Russia had just decreased allowable foreign ownership from 50% to 20%. Didn’t go very deep into it, not sure what foreigners are holding currently…but that sort of ended my interest.

Yeah…I can see how foreign ownership of media might be a problem to Mr. Putin.

What broker do you use? I’m interested in getting into international investing…but with Fidelity trades are like $50/each, f that.

I’m on Interactive Brokers (just moved there from Scottrade) but am still figuring out the cost of trading on other exchanges.

It appears you have to buy data for each exchange; so London is 5GBP, Tokyo is 300JPY, etc. And they add a small commission to the FX translation (trade value x .00002%, minimum $2 USD). So if I’ve got that right (not sure that I do), it would be $8 USD/month to trade on the LSE, plus $2 per trade. You might be able to trade blind and avoid the monthly fee, but that seems rather dangerous.

BChad uses them too I believe, perhaps he can comment.

Here’s an analysis which attempts to quantify country risk. Thought it was fairly interesting…

---------------------------------------- The last two columns show the potential upside of the Russian shares, based on the assumption that after the political situation calms down, the Russian P/E ratios should move to the international P/E ratio levels minus Russian equity risk premium. The energy sector is the most undervalued of all, followed by telecommunications, steel-making and banking. On the other hand, the retail and technology sectors are overvalued at present. The only correctly valued sector seems to be gold mining, in this case represented by Polyus Gold. Using the weights of the above mentioned companies that represent more than 80% of RSX’s portfolio, and their calculated upside potential, RSX has upside potential of 46%, or 35% using the conservative equity market risk premium. Of course, the condition for realization of this potential is resolution of the problems between Russia and Ukraine, and termination of the sanctions. Conclusion: The Russian share market as a whole is significantly undervalued, although this undervaluation is caused by only a couple of sectors. The biggest value is hidden in the energy sector. Based on the current conditions and some rough calculations, there is approximately 40% upside potential to be realised after the problems are resolved, sanctions are lifted and the situation calms down. Although it is hard to predict how long it will take, there are some positive signs, such as the fragile armistice and the advanced discussions between Gazprom and Ukraine about a new gas deal. Anyway, RSX is a risky buy, unless the above mentioned problems are resolved.

http://seekingalpha.com/article/2596345-russian-stock-market-cheap-but-risky