THE RUSSIAN STOCK MARKET CRASH AN OPPORTUNITY?
Channel: Value Investing with Sven Carlin, Ph.D.
Date: 2018-04-10

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Is there blood in the streets in Russia?

As I am writing this, the Russian ETF lost 12% in one day. As many value investors know, you need to buy stocks when there is blood on the streets so I have had many questions whether this is an opportunity or a trap. Let’s take a look at what is going on, give a fundamental perspective and a stock market perspective on investing in Russia. 

What happened over the weekend

https://home.treasury.gov/news/featured-stories/treasury-designates-russian-oligarchs-officials-and-entities-in-response-to

On Friday, Trump designed sanctions on 7 Russian oligarchs and 12 companies they own or control, 17 Russian government officials and a state-owned Russian weapon trading company. The reasons are, according to Treasury secretary Mnuchin that the Russian government engages in a range of malign activity around the globe. So, U.S. persons are generally prohibited from dealings with them where also an non-U.S. person could face sanctions for facilitating their transactions. The companies affected are: Norilsk, Gazprom, Renova and Rusal among those traded on U.S. stock exchanges where its CEO Deripaska who is investigated for money laundering and accused of treating part in extortion and racketeering. 
And I thought that in the U.S. you are not guilty until proven otherwise in a courtroom.

Nevertheless, this is exactly the risk I have been discussing when investing in Russia. Even if the cheapest stock market today, it is so for a reason. If all holders of the ERUS ETF from the U.S. or from Europe are forced to sell their holdings because facilitating Deripaska and others with capital the price will be very low. So, investing in Russia is a political thing but as always, if you don’t have any constrains from Trump’s sanctions, it is also an opportunity. Let’s take a longer term look
In the 2014/2015 period the Russian ETF lost 50% on lower oil prices and sanctions. Then there was a bit of a quiet period and slowly people have been forgetting about the risks with higher commodity prices as the Russian ETF is 37% oil related. However, those who bought when there was blood on the street did well with a 50% return since January 2016. The key now is to see whether there is blood on the streets now and whether the sanctions will have an impact on the actual businesses and your ownership. The best way to look at whether there is blood on the streets is to look at fundamentals.

Fundamentals

ERUS’s PE ratio is 6, the price to book value is 0.8 and the yield is 5.7%. However let’s take a lookout what happened in the last round of sanctions!

Sberbank, the largest Russian bank had a PE ratio of 2 if I remember well in 2015 and was trading at below $5.