Cheap markets are incredibly easy to avoid. It takes a very brave investor to take a stake in a market where millions of other investors have been cleaned out.
Take the fallout from the dotcom bust, for example. At the time, investors were being fed daily stories of bust companies and wiped-out retirement funds. Tech stocks gained a poisonous reputation and took years to recover.
Gold, too, suffered the same fate. Anyone who bought gold at the turn of the millennium would probably have been considered something of an unhinged crank.
But those cheap and ugly markets recovered. And if you are smart and you’re willing to be brave, there is a lot to be said for taking aggressive bets against the herd.
Today, one market is shunned more than any other major market. There are very good reasons why it has such a poisonous reputation. But I think investors could be missing a serious opportunity here. Especially for those of us in the UK.
Today I want to talk about Russia – the leper of the world’s major markets – and why I think now is a perfect time to claim a stake in what is a pretty remarkable recovery.
Now that’s what I call a market crash
Russia has had a very rough ride over the last few years. Just take a look at the chart below to see what I mean. The blue line shows the Russian RTS index over the last three years. I’ve plotted it against the FTSE 250 (in black).
Russia’s RTS versus the FTSE 250, last three years
As you can see, the RTS collapsed from nearly 2,500 to 500. It lost practically 80% of its value during the crisis of 2008/09!
And even though the RTS has climbed back out of its hole, it has yet to come back to where it was before the financial crisis. Meanwhile, the FTSE 250 has been smashing through new highs.
Is there are a good reason why Russia is so much cheaper? Well yes. In fact there are two very good reasons.
Why investors hate Russia
Investors clearly hate Russian stocks. Today, the RTS trades on a pprice to earnings ratio of around 8 times earnings. Compare that to the FTSE 250 which is on nearly 19 times!
There are two main reasons why Russia is so hated: the first is political risk; the second is it’s dependency on oil.
Now yes, the Russian market is heavily correlated with the price of oil, But we don’t avoid markets or stocks just because they’re highly correlated to something. I mean, BP and Shell are highly correlated to oil too, but we still buy them. It’s true that 80% of Russia’s exports are commodity-related and 45% of budget revenues stem from oil, so this is a commodities based market. So what? I can think of worse places to be.
The UK, for instance, where the economy is based on consumption, imports and financial services.
And as for the political risk. Well, yes it’s true, you certainly don’t want to get on the wrong side of the Kremlin when it comes to your investments. And I don’t want to downplay this issue. But, many of the firms on the Russian exchange have got the Kremlin behind them – presumably that’s why they’ve done well.
That means many have political firepower on their side. We only have to look as far as the BP-Rosneft deal for confirmation of how the politicians can help cement great deals on an international scale.
And the Russians have one other serious advantage over those of us in the UK.
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Russia’s one step ahead of the UK
The Red revolution of the post war decades promised Russian folk the best of everything. A planned economy would deliver where a selfish, capitalistic model couldn’t. And the public believed the hype.
But of course the whole system fell apart. Today, the Russians know all about being let down by politicians, bureaucrats and dictators. They don’t expect a road paved with gold. In fact, they don’t expect anything.
So what about the UK? Well, we too have been promised the world, but we’re yet to be let down.
Pensions, public services, and the whole welfare state hold promises that our society just can’t deliver – at least not to the extent that people demand. Forgive me if this sounds like scaremongering, but in my opinion we’re yet to face-out our trials.
And the problem in the West is that there’s a heck of a lot of promises and expectations out there.
So why not diversify into a cheap market?
I concede that there’s political risk in Russia – it’s there for everyone to see. I also accept that their economy is highly focused on the commodities side of things.
But I would argue that neither of these two factors are as bad as they appear.
And what’s more, when it comes to investments, it’s usually best to buy into markets where the downside is already priced in. To me, that’s the RTS which trades on around eight times earnings.
And it’s also usually wise to be a little sceptical about markets that could be subjected to hidden risks that aren’t priced in – the FTSE 250 trading on 19 times earnings.
• This article was first published in the free investment email The Right side. Sign up to The Right Side here.
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