Russian Stocks Now A Contrarian Buy
Charles Sizemore | Jul 20, 2014 12:17AM ET
Here we go again. First, the U.S. puts new sanctions on Russia, limiting the ability of Russian companies to raise capital in the United States. Then—and much more disturbingly—a commercial airliner crashed in Eastern Ukraine. News is still dribbling in at time of writing, but it looks like the plane was accidentally shot down by pro-Russian insurgents; though at this point, the Ukrainian military cannot be ruled out. Given the poor training of both sides, it could have easily been either one.
Virtually all world equity markets sold off sharply on Thursday, and the MarketVectors Russia ETF (NYSE:RSX)—the most popular and liquid way for Americans to play the Russian market—finished the day down over 7%. Russian stocks recovered some of their losses on Friday, and RSX finished the trading day up 2.4%.
So, what now? Are investors right to dump Russian stocks?
No. I would expect the death of so many civilians to de-escalate the Ukraine conflict in the immediate term, as neither side wants to be held responsible. I do not expect the conflict to be resolved, mind you; I simply expect it to de-escalate for a while.
Meanwhile, the Western sanctions on Russia—while biting deeper and affected a broader segment of the Russian economy—are still mostly symbolic. The West has neither the power nor the willpower to effectively isolate Russia, and virtually every Western country has significant business interests at stake. The is particularly true of the energy sector.
But the biggest reason to own Russian stocks is that they are cheap. After Greek stocks, Russian stocks are the cheapest in the world with a cyclically adjusted price/earnings ratio of just 6. At that level, the market is already pricing in a deep recession and earnings collapse in Russian companies. Anything outside that, which is slightly less bad would make Russian stocks the buy of a lifetime.
Disclosure: Charles Lewis Sizemore, CFA, is the editor of TraderPlanet .
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