Russia: There’s cheap and then there is “near-death” cheap

October 4, 2014

Russia’s equity market has always been cheap, argues USAA‘s Wasif Latif, but at present levels it is just too cheap to ignore. Russia’s economic decline, driven by not only falling oil prices, its main source of income, but also Western sanctions over its intervention in Ukraine has caused a major sell-off that Latif and other asset managers believe is an overshoot. This has brought Russia’s benchmark dollar-denominated RTS stock index to its lowest level since March and before that, a level not seen since Sept. 2009.

“We’re not looking for it to go way up, but looking for it to go up from its near-death cheap to its normal-cheap condition,” said Latif, head of global multi-assets at USAA Investments.

From a high in late June through Oct. 3, the RTS stock index is down over 23 percent. Its market cap is just over $418 billion while the price/earnings ratio is 6.45 with a dividend yield of 4.86 percent. 


The Russian benchmark stock index has dropped 23.15 percent from a recent high in June, 2014.

“Russia, with its warts and all such as its governance issues, poor capital allocations has always been cheap…. We’re buying it in small amounts and by no means are we backing up the truck and loading up on Russia. We are mindful of the risks and buying selectively. We’re more comfortable buying through the ETFs (exchange traded funds) such as the Van Eck Market Vectors Russia or the iShares MSCI Russia Capped fund,” Latif said.

As my colleagues Sujata Rao and Karin Strohecker wrote, the risks to investing in Russian stocks are tied up in a sharp decline in the value of the rouble, which is trading just under 40 to the dollar, a record low. In June it was around 33.60. For the investor looking for hard currency returns this can pose a problem, they explain.

Latif, who oversees $28 billion in mutual fund assets at San Antonio, Texas-based USAA, also notes that Chinese equities are cheap too, with a lot of room for consumer consumption to increase and boost earnings longer term.

For emerging market specialists at London-based Ashmore, Russia poses a challenge.

“There is definitely a lot of country risk associated with the sanctions,” said Julie Dickson, portfolio manager and head of equities for Ashmore. “The market has more than priced this into Russia. It is very cheap and hard to ignore. It is truly trading at trough levels,” Dickson said.

Ashmore has $6.1 billion in emerging market equities. Both Dickson and Latif believe emerging market small-cap stocks have the greatest upside potential looking in to 2015.

But it was back in May, when I wrote about Dickson and others holding fast in Russia, that a relief rally started, pulling the RTS index up 23 percent. Now, all of that move is gone and then some. The shooting down of Malaysian Air flight MH17 over eastern Ukraine on July 17 accelerated the Russian sell-off and exacerbated a situation whereby investors looked elsewhere to put their money. It also highlighted a big decline in corporate debt issuance from eastern Europe and Russia. Dickson still believes there will eventually be a political resolution rather than endless fighting in Ukraine.

The geopolitical risks that have roiled emerging markets seem to be taken more in stride, even as news of more beheadings by Islamist State militants brings a military bombardment from the air. 

“The Middle East is getting attention for all the wrong reasons. There are changes happening,” said Dickson.

In this case it is Saudi Arabia, she said, where investors are faced with attractive valuations when it is scheduled to open up to foreign investors in mid-2015.

“The market is attractively priced because it has been off the radar due to the difficulty in trying to ivnest and operate there,” Dickson said.

Banks make up the vast majority of the stocks on offer, according to Dickson, but she adds there is a growing diversification underway.

“Assets in the Saudi market are mostly financial, with both direct and indirect consumer sector access. Consumer spending is up 27 percent over the past 10 years, according to research we have seen. Less than 50 percent of the population is below the age of 30 years. That’s UN data. Health, education, housing, retail and discretionary spending are all growth areas in Saudi. 20 percent of our Middle East exposure is in Saudi Arabia,” she said.

Saudi Arabia’s benchmark stock index, the Tadawul FF index is up 27.11 percent so far this year. The market capitalization is hovering around $585 billion with a price-to-earnings ratio of 18.24 percent and a dividend yield of 3.22 percent. Since the announcement on July 22, market cap has risen by about $55 billion while the benchmark index has shot higher by 11.32 percent. In contrast, the U.S. benchmark Standard & Poor’s 500 stock index is trading with a p/e ratio of 18.36 percent and a dividend yield of 2.38 percent. It’s market capitalization is $18 trillion.


The Saudi Arabian benchmark stock index has gained 11.32 percent since July when the government announced foreigners could have direct ownership starting in mid-2015

So even as emerging market equities overall are now back to a slight negative performance on the year, Dickson is ever the optimist and perhaps just as in May when we last spoke, it will be the start of another rally.

“Emerging markets, yes, the sentiment has come off a bit but I’m not overly concerned. Fundamentals are still there. Valuations overshot and have returned, but I’m looking at a rebound,” she said.

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