I thought about this thread today when I saw this bit on Bloomberg by Mohammed El-Arian.
http://www.bloombergview.com/articles/2014-11-10/how-close-is-russia-to-financial-crisis
i think investors are looking at equity returns in russia as being binary. they’re giving a ~50% probability to complete and utter expropriation by the russian state and zero returns for equity investors and a ~50% probability to putin getting assassinated and the rise of some nancyboy who was educated in the U.S. taking power, therefore justifying a 12x PE. even if putin was not in power, i don’t believe that russian equities would ever be given a valuation like anywhere else in the developed or emerging world. its politics have been volatile since the beginning of time and it will likely take hundreds of years before capitalism is accepted, if ever.
i would imagine that most PMs would avoid Russia entirely due to this binary outlook as its always tough to tell your clients you lost 100% on an investment. it tends to make you look stupid.
Yeah, it’s kinda binary-ish, and it’s hard to see how the upside case happens… Putin doesn’t do what people say, fact. The US financially terrorizes people who don’t do what they say, and issues massive negative propaganda to the West (who are big investors), fact. This cannot be resolved so Putin says fuck off and aligns with the East (China, etc). Big money investors in the US/West stay away, or short, but then Russia limits Western shareholders…so even if they wanted to they couldn’t drive the price back up. Who buys, Russians in a hurting economy? Meh, probably a sloppy analysis on my part, but the whole thing is too messy for my taste. But for anyone who likes day trading / gambling (not me) there have been some hefty price movements in the last week!
It’s really not all country/political, even with Russia. There are varying degrees of risk by company and picking the right company is much more important. There hole the size of the grand canyon between Yandex and SBERBANK.
I suggested Russa to a portfolio manager at Capital Group in an interview and he said he couldn’t bear the currency risk. I said, “Hedge it.” He said, “Hedge 2-5 billion dollars?”
Yeah, not really cost effective to hedge currency risk in EM funds. It would be great to hedge weaker economies in the face of a rising dollar, but you pay a lot for that insurance.
IMO Russian equities = dead, probably for at least next 10 years.
IMO Russian equities = dead, probably for at least next 10 years.
Russia is one of the best performing markets in the world ytd. Up over 20% (depending on your currency perspective).
It is the cheapest stock market globally by most measures. Over the next decade, I think the CAGR from Russian equities will probably be 10%+ versus perhaps 5% for US equities.
Short term volatility is very high of course. But Russia is a great buy and hold right now.
Bump, who is on board now? That Carson guy nailed it, still holding dude?
It’s still Russia, it’s still cheap (looks like 8X P/E according to the ETF), but now Trump is apparently on their side. Way too much talk from his mouth, and with his team picks, to ignore…dude likes Russia.
Looking at this again, RSX is still the biggest and has options, and the smaller ERUS. And you can buy Gazprom (the largest component) on the LSE.
I saw an interesting analysis by a quant where they allocated to countries based on low CAPE (but I’m sure regular pe works too) and it was a very well performing strategy. If I decide to do this, I’m sure I’ll end up owning Russia (at least last I checked it was among the cheapest). I wouldn’t be picking stocks in the countries
Ha! This made me laugh. I had almost forgotten about our brief flirtation with Russian equities.
A couple of guys on our investment committee never liked our Russian equity position. Too much volatility. In the end we bowed to pressure and sold in July 2015 for around the level we bought in at. I still think Russia is a great long-term buy here. The market is so cheap. Same goes for China. You’ve just got to have patience which unfortunately not everyone on our IC could appreciate!
^ Those bastards, that was a sweet position!!! 
Investing using CAPE will not produce great long term results. You’d be making huge assumptions, like a cape of 21 in country X is equivalent to a cape of 21 in country Y, without incorporating a multitude of other factors. You’d also be making the assumption that the inputs of CAPE are consistent around the world, which would be a big mistake. Finally, you’d be assuming that inputs have remained constant over time, which again would lead you to false conclusions. Just as an example for US investors alone, see Jeremy Siegel’s CFA pub on the CAPE…
http://www.cfapubs.org/doi/pdf/10.2469/faj.v72.n3.1
Investing off of a countries CAPE is like investing in a company if I told you just the P/E ratio…nearly meaningless. The Russian stock market generated an average real rate of return of -5% from 1996 to 2014, and it would have had a great valuation the entire way. Russia is valued ‘cheaply’ because it deserves to be.
But who am I to get in the way of good speculation…
Yes, but things changed on Nov 9th.
My issue with Russian equities has always that Putin is against investors, while Obama and Xie Jinping are on our side. Putin cares more about proving his BSD, and will subordinate all other concerns, including his own economy, in his battle with the US/West. So yes, low valuations were justified, too much Putin risk.
But this potentially changes that, it’s all pretty cloudy though. What isn’t cloudy is that 8X Russia vs 26X US is a pretty big valuation difference.
If you’re playing the oil volatility game then it doesn’t really matter if you’re picking Russian or US oil stocks. You’re probably better off with US oil (no foreign tax on ADR dividends, although there are ways to play around it during tax filing). Chevron rallied pretty much the same (if not more) as foreign oil stocks.
It’s a shame most of the posters on AF are like huskie. His reply is full of anecdote and trying to treat my mention of a quant study as speculating. We can all link to studies about the weaknesses of Cape. That doesn’t address my comment at all. Thanks for taking the time to reply though.
Interesting response. You mention a study where allocating by CAPE produced great returns. I reply that I don’t believe that would be true, and list flaws. You reply that my comment is dumb.
I would expect that if you’re going to pursue an investment strategy, you’d want it to work out. Therefore, when facing criticism you either argue the counterpoint and allow that to be critiqued, or you accept the criticism and be thankful that you didn’t pursue a lousy strategy. But, you’re not losing my money, so what do I care. Good luck
Well I took a small piece of RSX, it pays its dividend next week, plus I sold call options against it…so 3% income over the next two weeks. Shrug, not optimistic about Russia, but I’ve got too much cash.
great point huskie. but i think whats more important is their eps growth as oppose to price growth. if their eps growth is rising consistently, while price is falling, then that’s a solid deal.
another great point mentioned here is their reputation. reputation is probably one of the most important things in business/investing. slow honest growth is better than fast fabricated growth.