Saturday, January 3, 2015

Russia is the cheapest market in the world, I'm nibbling

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I have been watching with fascination the drop in the Russian markets and the ruble. With oil prices down over 50% since June the perception is that Russia is in big trouble. Granted, the Russians would prefer oil at $100 per barrel but the country is nowhere as weak as it was in 1998, the last time the Russians were embroiled in a financial panic. Lower oil prices will not cause a financial calamity in Russia or cause the fall of the government. In fact, I believe that the current economic situation in Russia will lead to reforms and and a push the government to diversify the economy long term away from natural resources. I also believe that the continued antagonism towards Russia that the US is pushing will lead to Russia pivoting towards Asia and China specifically. I do not think that will be good long term for Europe or the US.

Russia is flat out cheap and I think buying now with the idea of holding for a few years will lead to outstanding gains. Here is how cheap some of the major companies in Russia are right now:

Sberbank  down 39%   PE 3.3   Div Yield  6.2%
Gazprom  down 53%         2.7                   10.9%
Lukoil      down 45%         3.2                     8.5%
Rosneft    down 58%         4.4                    13.1%

Those are Russian blue chips and they are being sold at prices that suggest the end of Russia, Could they go lower? Sure but in that case you would buy more. Can the dividends get cut? Yes but remember even though the price of oil has went down so has the ruble. The Russians are nearly getting the same amount of rubles that they were getting before. granted this means more inflation for imported goods and any dividends paid will be lose value in the conversion but the case is made that this is a cheap market.

Russian government debt is only around 13% of GDP as opposed to nearly 100% in the US and well over 100% in most Western European countries.The economy in Russia will contract by about 5-10% next year. However oil prices will recover and I suspect that when the sanctions come up for approval in March that the Europeans will balk at continuing them like the US wants. It is simply costing too much money.

It is not time to jump in whole hog but I have got Russia on my watch list and I have a small position in RSX. I think as oil recovers later 2015 that Russia will recover.


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