Russian market valuation - great opportunity or a sinking ship?

Hi everybody, I’m fresh on this forum. My backround: I’m a 26-year old Mechanical Engineer from Finland. I’ve been speculating since 2013 and investing since 2016.

If you happened to read, many thanks for Preston and Stig for the great services they provide for the community. Currently living in Germany I spend a lot of time in the traffic, your podcasts have changed my long commutes to an exciting learning periods.

My question is about investing in Russia via ETF’s. Below are some of my thoughts, I would really appreciate if some of the members here could share their views about it.

Market valuation
Based on Russia is currently the cheapest stock market, with a P/E of 7.1 and P/B of 0.9.
As discussed in the podcasts, historically you have done well when investing in items which are “out of trend” i.e. US stock in the 80’s, Scandinavian finance stocks in 90’s, Asian stocks in 00’s. As Jim Rogers said in the podcast 139 he would invest in gold when “when everybody gives up and throws it out the window it’s usually a good time to buy anything, including gold”.
Would this apply now to the Russian market?

Russian economy is largely based on commodities which are valued around $75 trillion. Mostly in oil and gas but also very rich in metals, non-metal ores (phosphate, talc, potash etc.) and huge reserves of construction material (stones, clay, sand etc).
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Referring to Jim Rogers, he predicts that Asia and China especially will be the big player in the future. Russia has the energy and natural resources to feed the growth in Asia.

Russian GDP follows the price of oil very closely. Similar pattern can be seen with the currency and stock market value. In 2016 the GDP was $1283 million. This is a radical drop to 2013 level of $2230 million.

Interesting statistic regarding number of Engineers graduating in Russia. The figure is almost twice as high as in the US. It’s not apples to apples comparison since the school system is different, but it could unlock real value in the future.
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Public debt to GDP
Russian government debt (~$160 billion) to GDP is around 16%, which is one of the lower if not lowest in Europe and very low in comparison to the US (102%). Russian 10-year bond yield is around 8%, which is high compared to 2.3% US equivalent.

Private debt to GDP
Russian household debt to GDP was about 13.5%, which is also very low.

Gold reserves
Russian gold reserves in early 2017 is 1680 tons (7th largest gold reserves in the world).

Russia has proved her ambitions to become a major player in the world geopolitics. The annex of Crimea & eastern Ukraine (downing of a passenger jet in eastern Ukraine). Military intervention in Syria since 2015 tipped the balance in favor of Syrian regime.
Aggressive Russian policy could potentially set her on a clash course with the West (even more than now).

The Russian population in recent years has been stagnant. Largest group between ages 25-29.
Russian society is highly corrupted, ranking 131 of 176.
Majority of the wealth is in the hands of millionaires and billionaires.
Russia is lacking the ability to create new products and even create new demand for such products (currently most inventions come from the US, I can’t think many Russian products). I don’t see improvement here. People don’t want Russian goods and are not interested about Russian lifestyle.
Santions imposed in 2014 targeted several oil companies and banks. It hinders co-operation with western oil companies and prevents access to foreign funding.

I was thinking iShares Russia ETF.
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By valuation it seems very cheap with a P/E of 6.50 and P/B of 0.68.
Have you got any recommendations here?
Compared to western market valuation Russian stock market is severely undervalued.
Investing in Russia is betting on rising commodity prices. I think the undervaluation is going to stay in near to mid-term because of sanctions and low oil prices. In the long-term I consider Russia a very lucrative investment because of its huge natural resources. Meanwhile I may enjoy the dividends.
What do you think, please shoot holes to my analysis. Is the low PE and PB ratio good enough margin of safety?


  • I apologize for the bad layout, I need some practice! :s
  • Welcome to the forum Sinalco,

    Great post which I enjoyed reading!,

    There are a few things which must be considered before investing in Russia. Firstly the accounting standards are not as consistent as the GAAP(Generally accepted accounting principles) form found in the US, UK and parts of Europe so one must be diligent when appraising a prospect investment. Secondly, the Russian Government has a habit of interfering in the markets and instances of companies being nationalized or having assets seized have occurred in the past(Most Governments have a habit of interfering in the market those usually not to this extent.), Thirdly, as you mentioned the Russian economy is heavily based upon commodities and so its fortunes are closely tied to the rise and fall in commodities prices.

    Myself, Christoph and a few other board members have had success investing in Russian stocks in the past and I would certainly consider future investments in the country. For reference I previously invested in Sberbank (SBER);

    and QIWI PLC (QIWI);

    As you have pointed out, looking at Star Capital's stock market valuations Russia looks very cheap indeed and crucially both their public and private debt relative to GDP is very low indeed. As Professor Steve Keen and Credit Expert Richard Vague have demonstrated, countries with high levels of private debt and an increasing rate of growth of said debt tend to experience a recession and market correction. Russia, unlike Canada, Australia, S. Korea and others does not fall into this category.

    The late great value investor Sir John Templeton would certainly be investing in Russia given its current low valuations. Now the question arises does one buy an ETF or invest in individual companies. Personally I'm not a fan of investing in ETF's because I can't conduct enough research on all the component companies to be comfortable, further I don't want to have to pay management fees when I can mimic the ETF by buying a basket of stocks myself. The other issue with ETF's is that they may be leveraged(No Thanks!) and can be path dependent, particularly if the companies are commodity related. For an explanation of Path Dependence see here;

    The obvious perceived benefit to investing in ETF's is that one can spread one's risk. As Warren Buffett has said, risk comes from not knowing what you are doing, so one must be diligent in one's research. This rules out ETF's for me because I can't familiarize myself with all the nuances of all the companies held in the ETF, I want to know each company intimately and judge each one on a case by case basis. This still applies, though to a lesser extent, when employing Graham's Net-net strategy.

    Another benefit to buying an ETF is it gives one easier access to the Russian Market and the trading volume in these funds provides greater liquidity for entry/exit of the investment. I personally do not invest in ETF's for the reasons I stated above though I can see how they would be useful for certain investors.

    Returning to the valuation metrics for Russia there is no doubt it is cheap, this is what one should be focusing on but one should not be investing based upon the hopes that commodity prices will rise as this is speculation. Instead we use the evidence of the cheapness of the Russian Market as a starting point for further research to begin to dig into individual companies. I personally look for individual companies which are cheap on a fundamental basis, then I can dig into them further to see what the capital structure, debt levels, margins etc are. Alternatively on can employ the Templeton/Schloss approach and buy a basket of cheap stocks (Low P/E, P/B, P/S). Remember that cyclical stocks should be bought when the P/E is high due to depressed earnings, a low P/E for a cyclical stock gives a false reading of value!. This is one of the reasons why Sir John Templeton used the method of triangulation to value companies, he would value a company based upon 3 or more metrics to be sure it was cheap on a fundamental level!

    The first thing I tend to do is to have a look at the ADR's/GDR's (American/Global depository receipts) for the country in question as this can be an easier way to buy stock in companies if one's broker does not cover said market directly. See here;

    See the list here;

    I like to trawl through the companies listed, look them up ans see if anything catches my eye, alternatively one can use a stock screener such as FT's Global Equities Screener to look for prospective companies.

    In summary, Yes, I agree that the Russian Market is the cheapest by most, if not all valuation metrics and I think value can be found here. Whether one decides to invest in an ETF or individual companies is a personal preference, I opt for the latter. Perhaps we could keep this discussion going and suggest some prospective investment opportunities.


  • edited July 2017
    Here's a few stocks/ADR's/GDR's I've found after looking through the list;

    Tatneft PJSC ADR (ATAD)

    Large Cap Oil & Gas Major, looks like it has up, mid and down-stream operations and also is involved in various chemicals manufacture and refining. Seems to have held up quite well given the decline in commodities prices and margins look quite good, ROIC is quite strong and current div yield is 6.18%. It's not absurdly cheap but still offers pretty good value at a P/B of 1.2, a P/S of 1.5 and a P/CF of 6.1. None too shabby considering the relative strength of net profit margin and ROIC.

    Federal Grid Co of Unified Energy System PJSC GDR (FEES)

    Mid Cap Utilities company engaged in transmission of electricity via Russian national power grid. Margins and net income are very lumpy, ROIC looks weak, debt and liquidity position looks okay. The trend in BV doesn't look great either. Having said this its cheap with a P/B of 0.4, a P/S of 1.1 and a P/CF of 2.5. Current Div yield is 5.57%. Could be some value here, worth a closer look at least.

    Gazprom PJSC ADR OGZD

    Large Cap Oil & Gas major, again operations are up, mid and down-stream. Share count has remained pretty static over the last decade, BV has risen and fallen with commodities prices, no doubt due to asset write-downs. ROIC is currently weak due to depressed commodities prices, Debt and liquidity position is quite strong. This stock is cheap with a P/B of 0.2, a P/S of 0.5 and a P/CF of 2.8. Current Div yield is 5.86%

    PJSC Lukoil (LKOH)

    Large Cap Oil & Gas major, not as cheap as Gazprom but still cheap with a P/B of 0.6, a P/S of 0.4 and a P/CF of 2.9. Debt and liquidity position looks okay and the company has been buying back shares for the last few years now. Margins and ROIC have taken a hit with the declining commodities prices which is no surprise.

    There were a few other stocks on the list which I didn't mention, they were cheap but had a lot of hair on them. High debt levels, weak liquidity position, unsustainable payout ratios on dividends etc.

    Obviously I just cast a quick glance over the companies and one would need to conduct further research on each one before considering an investment. I think the way to go with regards to the Russian market would be to buy a basket of cheap stocks to mitigate the risk of non-market factors such as fraud/Government meddling etc.



    P.S. For those who are looking for these stocks who don't have access to the LSE they can generally be found on other European and OTC markets. I only went through the Russian ADR's/GDR's trading on the LSE so there are obviously many others covered in separate lists on this site;
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