Russian stocks, represented by the Market Vectors Russia ETF (NYSE: RSX), have seen a decline of 15 percent since the start of the year. On Monday, amid rising tensions, the RSX fell by 10 percent following concerns over President Vladimir Putin’s stability. However, on Tuesday, Russian stocks rebounded by 4 percent after Putin indicated he would refrain from using military force in Ukraine—at least for the time being.
Wednesday saw the RSX remain stable, but it dropped approximately 1 percent the following day. Could this be a pivotal moment for struggling Russian stocks? Although it’s uncertain, it certainly warrants deeper examination.
Jacob Nell from Morgan Stanley notes that the recent sell-off has pushed the market into extreme oversold territory. He compares current valuation multiples to those during the financial crisis of 2008, when earnings plummeted by about 60 percent. While the crisis has understandably dampened growth expectations, any sign of easing tensions could present a prime buying opportunity.
To provide context, Russian stocks’ valuation stands in stark contrast to U.S. stocks. The RSX has a price-to-earnings ratio of just 6, while the S&P 500 is priced at 19.86 times earnings—more than triple the cost of Russian stocks. Does this substantial price difference indicate that Russian stocks are a bargain?
Not necessarily. A low price may reflect the poor prospects of the underlying business itself. Take Kodak, for instance—its business model is faltering and unlikely to rebound.
Profiting from Mean Reversion
It’s worth noting that a stock might appear inexpensive simply because it is broadly disliked by investors. The same can apply to an entire country’s stock market. Even if a nation’s citizens are industrious and principled, a volatile leader can tarnish the investment potential of an entire economy.
Among global markets, Russian stocks stand out as particularly reviled. Investing in such markets often requires a mix of courage and conviction—who would willingly invest their hard-earned money in such uncertain circumstances?
At the Economic Prism, we are intrigued by stocks that seem to be trading for mere pennies on the dollar. What drives their low valuation? We believe they hold the potential to rebound to, or exceed, their historical averages.
Conversely, we are wary of stocks that have surged to new highs. The exuberance that drives these prices makes us hesitant—how sustainable is this momentum? Eventually, those highs also must fall back down, potentially dipping below their historical averages.
Interestingly, this current bull market celebrates its fifth anniversary this Sunday. On March 9, 2009, the S&P 500 closed at a low of 676, and as of yesterday, it reached a record high of 1,877. During this bull run, the index has gained a staggering 177 percent. What are the chances it will replicate this feat over the next five years?
A Buy Low Sell High Opportunity?
Our inclination is that the chances are slim. In fact, we anticipate that the S&P 500 may experience a substantial decline within the next five years. Hence, if the goal of investing is to buy low and sell high, is it wise to invest in an S&P 500 that has already climbed 177 percent?
Wouldn’t it be smarter to consider options that are currently at rock-bottom prices? Clearly, finding a genuine bargain is preferable to overpaying. But should Russian stocks be part of that strategy?
This question ultimately hinges on personal risk tolerance and the capacity to handle significant price fluctuations. Other emerging markets, such as Brazil, present attractive valuations without the complexities posed by the political landscape in Russia. There are numerous opportunities available, but we currently find ourselves focused on Russian stocks.
It is evident that part of the discount on Russian stocks is tied directly to the political risks associated with Putin. What bold move might he make next, and how could this affect investments in his nation’s businesses? Furthermore, who among American investors is likely to entrust their finances to Russian enterprises? Is it an act of betrayal or mere opportunism? These are complex questions that investors must consider for themselves. We merely aim to highlight this apparent market disparity for your reflection.
Rest assured, we will continue to monitor how this narrative unfolds.
Sincerely,
MN Gordon
for Economic Prism
Return from A Buy Low Sell High Opportunity? to Economic Prism
