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Russian Stocks are Cheap…But Cheap Enough?

February 07, 2014 | About:

Vladimir Putin kills puppies.

Ok, that comment probably needs a little context. The president of Russia does not personally murder small dogs for sadistic pleasure. But in preparation for the winter Olympics, the Sochi city government has culling the large local stray dog population by poisoning their food.

Putin, Slayer of Puppies

An authoritarian regime can lock political dissidents in jail and commit untold numbers of human rights abuses. But poisoning dogs by the hundreds just seems…well, for lack of better word, mean.

Sochi’s dogs are not the only ones at risk these days. 57% of Americans believe that a violent act of terrorism at the games is likely. And pity the poor residents of Sochi itself. Human Rights Watch has an entire webpage dedicated to listing out human rights abuses in the lead up to the games, including everything from forced evictions of locals, abuse of migrant workers, and intimidation of the media.

But while all of this might make Russia an unpleasant place to live, none of it necessarily makes Russia a bad investment destination, does it? After all the bad press Russia is getting, might Russian stocks be a decent contrarian investment?

Let’s look at the numbers. Russian stocks are definitely cheap. By Financial Times estimates, Russian stocks trade for just 5.6 times earnings. Taking a longer view, looking at the Shiller Cyclically Adjusted Price/Earnings ratio (or CAPE), you get a multiple of just 6.96 times earnings, making it the second-cheapest market in the world after Greece.

But what exactly are you buying when you buy Russian stocks? Let’s take a look under the hood at the ETFs that track the Russian market: the Market Vectors Russia ETF (RSX), the iShares MSCI Russia Capped Index (ERUS) and the SPDR S&P Russia (RBL).

Fund

Ticker

Avg Volume

Net Assets

YTD Return (Feb 5)

Market Vectors Russia

RSX

3,939,640

$908.47 million

-12.50%

iShares MSCI Russia Capped

ERUS

465,732

$305.67 million

-10.98%

SPDR S&P Russia

RBL

47,984

$16.03 million

-11.70%

A few points immediately jump off the page. The Market Vectors Russia ETF is substantially bigger and more liquid than the other options. Its assets under management are nearly three times bigger than that of the iShares MSCI Russia ETF, and its daily trading volume is more than eight times bigger. Its performance year to date is the worst of the three, yet the differences are minor.

I’m also inclined to lean towards the Market Vectors Russia ETF over the competitors because I consider the portfolio weights to be more reasonable. For example, OAO Gazprom makes up nearly 21% of the iShares MSCI Russia ETF and nearly 18% of the SPDR S&P Russia ETF. But its weighting is limited to only 9% of the Market Vectors Russia ETF. RSX clearly gives the best diversification of the lot.

Should you buy Russian stocks? Well, they’re cheap. But then, Russian stocks are almost always cheap. That 6.96 CAPE valuation I mentioned is only slightly lower than the 8.51 long-term average for the country. And while Russia still has a long way to go before it could be considered non-hostile to investors (let alone shareholder friendly), Russian stocks are boosting their dividends these days and making an effort to soften their images.

Ultimately though, a bet on Russia is a bet on energy prices. Energy stocks make up 40%-50% of the portfolios of each ETF, so as goes energy so goes Russia. Given that non-traditional production has made the United States the world’s largest oil producer and that new oil and gas discoveries in Argentina, Brazil and the Eastern Mediterranean, among others, promises to flood the globe with cheap energy for the foreseeable future, betting on Russian energy—which Russia has been known to use as a political weapon—it’s hard to see a catalyst here that will shake Russian stocks out of their perpetual cheapness.

About the author:

Charles Sizemore
Charles Lewis Sizemore, CFA is the Chief Investment Officer of Sizemore Capital Management. Please contact our offices today for a portfolio consultation.

Mr. Sizemore has been a repeat guest on Fox Business News, has been quoted in Barron’s Magazine and the Wall Street Journal, and has been published in many respected financial websites, including MarketWatch, TheStreet.com, InvestorPlace, MSN Money, Seeking Alpha, Stocks, Futures, and Options Magazine and The Daily Reckoning.

Visit Charles Sizemore's Website


Rating: 3.3/5 (4 votes)

Comments

BEL-AIR
BEL-AIR - 7 months ago

That is a cheap shot at Russia Charles

No place is perfect, but You should go to Russia someday Charles you will find it alot more free than the good ole USA.

Just try to keep your posts within gurofocus guidelines from now on.

Have a good day.

augustabound
Augustabound - 7 months ago

I didn't see a cheap shot in that post at all, those are facts.

When investing in a country half way around the world, you need to take certain things into consideration, especially the political environment run by someone like Putin.

I'm reminded of Buffett's talk with a group of students where he illustrated his decision between investing in PetroChina and Yokos (Russian).

"I decided I’d rather be in China than Russia. I liked the investment climate better in China. In July, the owner of Yukos, Mikhail Khodorkovsky (at that time, the richest man in Russia) had breakfast with me and was asking for my consultation if they should expand into New York and if this was too onerous considering the SEC regulations. Four months later, Mikhail Khodorkovsky was in prison. Putin put him in. He took on Putin and lost. His decision on geopolitical thinking was wrong and now the company is finished."

Besides, I like puppies. :)

LwC
LwC - 7 months ago

"...you will find it alot more free than the good ole USA."

Can you spell "delusional"?

BEL-AIR
BEL-AIR - 7 months ago

Can you spell TSA, NSA, IRS ........ LOL

Funny you guys have no clue....

Even Jim Rogers likes Russia to invest in

http://www.youtube.com/watch?v=l6K0ccv3LGo

augustabound
Augustabound - 7 months ago

Funny you guys have no clue....

Even Jim Rogers likes Russia to invest in

Quote the part of my post where I said not to invest in Russia. Then you can take back the "no clue" comment.

LwC
LwC - 7 months ago

Well, according to Freedom House the USA is ranked as "free" while Russia is ranked as "not free". IMO Freedom House is a more credible source than "BEL-AIR".

USA:

status: free

freedom rating: 1.0

political rights rating: 1

civil rights rating: 1

Russia:

status: not free

freedom rating: 5.5

political rights rating: 5

civil rights rating: 6

code: (1=best, 7= worst)

http://www.freedomhouse.org/report/freedom-world/2014/russia-0#.Uve01Ch4Eqa

Funny you have no clue. LOL at yourself.

de·lu·sion noun \di-ˈlü-zhən, dē-\

Full Definition of DELUSION

1: the act of deluding : the state of being deluded

2a : something that is falsely or delusively believed or propagated

b : a persistent false psychotic belief regarding the self or persons or objects outside the self that is maintained despite indisputable evidence to the contrary; also : the abnormal state marked by such beliefs

http://www.merriam-webster.com/dictionary/delusion

BEL-AIR
BEL-AIR - 7 months ago

Freedom house? LOL Again you have no clue do youu... That is usa propaganda arms at it's best...

http://en.wikipedia.org/wiki/Freedom_House

Please tell me how many times you been to Russia LWC?

Freedom House is a U.S.-based[2] non-governmental organization (NGO)

A usa based? You don't say?

"As of 2010, grants awarded from the US government accounted for most of Freedom House's funding;[5]"

Funding come from United States? You don't say?

"Critics have accused Freedom House’s reports of bias or of promoting U.S. government interests abroad."

"The organization is directed by David J. Kramer, former head of the Bureau of Democracy, Human Rights, and Labor of the United States Department of State."

Former head of the United States Department of State Huh? ...... Ok

Criticism

The Financial Times has reported that Freedom House is one of several organizations selected by the State Department to receive funding for 'clandestine activities' inside Iran.[29] In a research study, with Ackerman acting as chief adviser, Freedom House sets out its conclusions: "Far more often than is generally understood, the change agent is broad-based, non-violent civic resistance - which employs tactics such as boycotts, mass protests, blockades, strikes and civil disobedience to de-legitimate authoritarian rulers and erode their sources of support, including the loyalty of their armed defenders."[29]

On June 8, 2006, the vice-chairman of Freedom House's board of trustees[30] asked the U.S. Senate to increase the share of NGO funding aimed at helping support non-violent foreign democratic activists organize for potential overthrows of their non-democratic governments. Palmer argued in favor of shifting funding away from NGOs working in already democratic nations to fund this effort.[31]

Cuban, Sudanese and Chinese criticism

In May 2001, the Committee on Non-Governmental Organizations of the United Nations heard arguments for and against Freedom House. Representatives of Cuba alleged that the organization is a U.S. foreign policy instrument linked to the CIA and "submitted proof of the politically motivated, interventionist activities the NGO (Freedom House) carried out against their Government". They also claimed a lack of criticism of U.S. human rights violations in the annual reports. Cuba also claimed that these violations are well documented by other reports, such as those of Human Rights Watch. Other countries such as China and Sudan also gave criticism. The Russian representative inquired "why this organization, an NGO which defended human rights, was against the creation of the International Criminal Court."[32]

So they are against the creation of an international court, could it be they are against this since there largest funder and backer the us goverment, could then not be comvicted of war crimes in Afghainistan and Iraq?

Russia

Russia, identified by Freedom House as "Not Free", called Freedom House biased and accused the group of serving U.S. interests. Sergei Markov, an MP from the United Russia party, called Freedom House a "Russophobic" organization. "There are many Russophobes there," he asserted.[33] In response, Christopher Walker, director of studies at Freedom House, argued that Freedom House made its evaluations based on objective criteria explained on the organization's web site, and he denied that it had a pro-U.S. agenda. "If you look closely at the 193 countries that we evaluate, you'll find that we criticize what are often considered strategic allies of the United States," he said.[33]

Daniel Treisman, a UCLA political scientist, has criticised Freedom House's assessment of Russia. Treisman has pointed out that Freedom House ranks Russia's political rights on the same level as the United Arab Emirates, which, according to Freedom House, is a federation of absolute monarchies with no hint of democracy anywhere in the system. Freedom House also ranks Russia's civil liberties on the same scale as those of Yemen. In Yemen, according to the constitution, Sharia law is the only source of legislation, and allows assaults and killings of women for alleged immoral behaviour. Criticising the president is illegal in Yemen.

U.S. domestic criticism

On December 7, 2004, U.S. House Representative Ron Paul criticized Freedom House for allegedly administering a U.S.-funded program in Ukraine where "much of that money was targeted to assist one particular candidate." Paul said that

"one part that we do know thus far is that the U.S. government, through the U.S. Agency for International Development (USAID), granted millions of dollars to the Poland-America-Ukraine Cooperation Initiative (PAUCI), which is administered by the U.S.-based Freedom House. PAUCI then sent U.S. Government funds to numerous Ukrainian non-governmental organizations (NGOs). This would be bad enough and would in itself constitute meddling in the internal affairs of a sovereign nation. But, what is worse is that many of these grantee organizations in Ukraine are blatantly in favor of presidential candidate Viktor Yushchenko."[35]

Noam Chomsky and Edward S. Herman have criticized the organization for excessively criticizing states opposed to US interests while being unduly sympathetic to regimes supportive of US interests.[36] According to Chomsky and Herman, Freedom House described the Rhodesian general election of 1979 as "fair" but found the Southern Rhodesian 1980 elections as "dubious".[36] They said that Freedom House found El Salvador's 1982 election to be "admirable".[36]

Alleged partiality toward Uzbekistan

Craig Murray, the British ambassador to Uzbekistan from 2002 to 2004, wrote that the executive director of Freedom House told him in 2003 that the group decided to back off from its efforts to spotlight human rights abuses in Uzbekistan, because some Republican board members (in Murray’s words) "expressed concern that Freedom House was failing to keep in sight the need to promote freedom in the widest sense, by giving full support to U.S. and coalition forces". Human rights abuses in Uzbekistan at the time included treatment of prisoners who were killed by "immersion in boiling liquid," and by strapping on a gas mask and blocking the filters, Murray reported.[37] Jennifer Windsor, the executive director of Freedom House in 2003, replied that Murray's "characterization of our conversation is an inexplicable misrepresentation not only of what was said at that meeting, but of Freedom House’s record in Uzbekistan ... Freedom House has been a consistent and harsh critic of the human rights situation in Uzbekistan, as clearly demonstrated in press releases and in our annual assessments of that country".[38]

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