I’ve taken a keen interest in the ongoing Russia/Ukraine affair…not least because I’m keen on Russia’s investment case! Of course, unbiased intelligence on the conflict is thin on the ground. I’m taking most things uttered by all factions with an extremely large pinch of salt. But one thing you can’t get away from is the fact that the West has got it in for Russia…and as far as the market goes, that’s been far from beneficial!
Now, don’t get me wrong. It’s not that I’m particularly enamoured by the ‘Russian way’. But I’m not very keen on the Western way either! Western economies are built on very shaky credit foundations…and as we both know, stock valuations are propped up by central bank manipulation.
Russia’s economy, on the other hand, is built on the solid foundations of oil and commodities. That’s exactly why Western leaders are muscling in on the local power–broking in this part of world.
And as far as Russian stocks go, at least they’re not manipulated by central banks. Trading at around five times earnings, the only thing propping up Russian stocks is fundamental valuation.
And it’s utterly fascinating for me to see that, despite the severe anti–Russia rhetoric coming out of the West, Russian stocks haven’t really fallen that much.
The following chart goes back to the dark days of 2008. The blue line plots my favoured Russian investment trust, JP Morgan Russia. As you can see, the market is certainly down over the recent times. But not quite as much as you might have expected, given the circumstances. Emerging markets have been out of vogue for well over a year…it’s as if the Ukrainian situation just exacerbated what was an existing problem.
I haven’t plotted the absolute price of the Russian fund. Instead, I’ve used Brent crude ETF, the pink line, as a comparator.
People often say that the Russian market is a proxy for the oil price. But really, as we can see on the chart, it’s more like the Russian market is oil, but on steroids!
The thing is, recent jitters have sent my favoured Russia fund right back to square one. Although the oil price has stabilised at a relatively high $109, this Russian fund hasn’t benefited with its usual steroidal surge. And we all know why that is.
At times like these, market participants get very nervous. They fear for the worst. And I guess, in many ways, so they should!
But then again, geopolitical tensions with Russia have a way of working themselves out. I don’t want to downplay what’s going on in Ukraine…but I think there’s an awful lot of sabre–rattling and rhetoric obscuring the real situation.
It will blow over (famous last words!), and when it does, Russian stocks are going to have a lot of catching up to do.
The main reason Russian stocks haven’t fallen further than they have, is that they were so cheap to start with! They are like a coiled spring. So close to its compression limit, it’s very hard to squeeze any more energy into it.
That sounds like a good time to buy to me.
Some say, ‘Buy when there’s blood on the streets’ — and although it’s unfortunate that the metaphor is so uncannily apt right now, it may not be a bad cliché to keep in mind.
Only time will tell.
Bengt Saelensminde
Contributing Editor, Money Morning
Ed note: The above article was originally published in MoneyWeek.
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