The Time Is Now To Invest In Russia

September 20, 2017

The Time Is Now To Invest In Russia

  • The Russian economy has returned to growth and the long-term prospects are positive.
  • The combination of the relative stock market cheapness and economic upturn could lead to outsized returns.
  • The ruble could strengthen further while the current dividend yield of 5% isn’t bad at all.

Introduction

At the end of 2016, I wrote about how it was best to avoid Russia due to its dependency on oil, slow development and progress even if it was and still is the cheapest stock market in the world. Since then, the Russian ETF has dropped almost 20% but has currently recovered to the December 2016 level.


Figure 1: MSCI Russia ETF in the last year, and since my last article. Source: iShares.

As things are always changing in the investing world, I wanted to take another look at Russia as an investment opportunity to see if the positive trend from the last few months could continue.



Oil Prices Have Recovered – What About The Economy?

As a country heavily dependent on commodities exports, the stabilization in oil prices is an extreme benefit for Russia. For the last year, oil prices have been trading around $50 and it’s important to see how the country adapted to these oil prices.


Figure 2: Oil prices in the last 5 years – finally some stabilization. Source: Bloomberg.

Even though oil prices are still far below the 2014 levels, the Russian economy has managed to absorb the shock and return to growth based on wholesale and retail trade, mining, manufacturing, and construction. Annualized growth in the last quarter reached a level of 2.5%.


Figure 3: Russian GDP growth. Source: Trading Economics.

Despite the low oil and commodity prices, the Russian balance of trade is still extremely positive.


Figure 4: Russian balance of trade. Source: Trading Economics.

The Russian Ruble has also strengthened to the dollar enabling the positive economic developments described above, which I must say have been a surprise to the markets and to me, there is still plenty of room for the Ruble to appreciate against international currencies.


Figure 5: RUB/USD. Source: XE.

Potential positive currency movements are always a good thing to be exposed to when investing abroad.

Political Risk

As the focus has shifted from Ukraine to North Korea, the tensions surrounding sanctions have also eased allowing Russian businesses to continue as usual. This further strengthens the case for an investment in Russia.

On top of it, Russia is lowering its dependency on demand from Europe and increasing its relations with China and the rest of Asia. The $4 trillion Chinese One Belt, One Road infrastructure project, which aims to increase the connectivity among 65 countries, especially in Asia, is going to impact Russia and its satellites positively.


Figure 6: One belt, one road will bring huge benefits to Asia. Source: Merics via Linkedin.



The interesting thing about the economic development and increased connectivity described is that the Western world doesn’t really acknowledge what’s going on in Asia and therefore investments are still extremely cheap, especially in Russia.

In the short-term, Russia is expected to finally put the accumulation of negative factors behind it and go back to the growth that used to define the country.


Figure 7: Goldman sees Russia leaving the negative behind and going back to growth mode. Source: Goldman Sachs.

Fundamentals

Despite the low oil prices, Russian businesses have remained profitable and their valuations are the lowest in the world.


Figure 8: Global price to earnings ratios (P/E). Source: Star Capital.

The price to book value is also among the lowest in the world at 0.8, the dividend yields are also high at an average 5.1%. This is very interesting, especially if the Ruble strengthens further.

How To Invest

An ETF is always an option, but the weight is heavily skewed toward the largest Russian companies which aren’t necessary the best investments to take advantage of the trends described above.


Figure 9: An ETF is pretty concentrated with the largest stocks. Source: iShares.

Those who are willing to do more homework could find really cheap gems that will increase their dividends as Asia develops and Russia benefits alongside.



Conclusion

Perhaps as a country Russia will never be a hot investment, but Russian companies will definitely benefit from the developing Asian environment surrounding it.

A P/E ratio of 7 in combination with a dividend yield of 5% coming after a few troubled years in Russia followed by a pick-up in economic activity, leads me to believe that earnings will grow and possibly valuations as well. An additional benefit should come from the stronger currency.

If you still aren’t a believer in Russia, I’ll show you one final chart. The Russian debt to GDP ratio.


Figure 10: Russian debt to GDP ratio. Source: Trading Economics.

The last time the U.S. had such a low debt to GDP ratio was prior to World War I. This shows that fundamentally speaking, the risk of the country and investing there is extremely low, no matter what others may think.