Moscow Bull: What Russian Stocks Teach Us About Investing in Emerging Markets
When you think about Russia, you probably don’t think “financial powerhouse.” It has a petroleum-based economy that has been devastated by the oil glut. And the U.S. and EU have levied harsh sanctions against Russia for its invasion of Ukraine.
Yet look at this graph of Russian equities...
Russian stocks are outperforming almost every other national market this year. At first, that might seem paradoxical. But by looking at the reasons for the rally, we can learn an important lesson about contrarian investing - especially in emerging markets.
Why have Russian ETF investors done so well at a time when Moscow is in such economic and political turmoil? One simple explanation is that this is the ultimate example of “buying the dip”...
What Goes Down Must Come Up
Almost every part of Russia’s economy collapsed as oil prices sank and punitive sanctions went up. The ruble fell by double digits, the stock market crashed, and GDP growth ground to a halt.
But in spite of all this hardship, Russia and its companies continued to exist. (They’re kind of known for surviving extreme onslaughts.)
That meant that its markets were bound to recover sooner or later. And contrarians understood that in the meantime, Russian stocks were the bargain of the decade.
Today, oil prices are recovering on the news of a semi-stable OPEC production freeze. Washington-Moscow relations are thawing after the election. And the frontlines of the Ukrainian war have been quiet for months.
Investors who hold Russian equities have pulled off perhaps the greatest value play of our time. And it’s largely been driven by a simple principle: All things must pass.
Every Collapse Has a Silver Lining
The rally in Russian stocks also illustrates a principle of macroeconomics that every emerging markets investor should understand. Market economies are incredibly good at self-stabilization. That’s because almost every economic disaster you can think of has some sort of upside.
Take the sanctions as an example. To be clear, Russians did suffer as a result of these measures. They were cut off from almost all Western imports. And the value of the ruble plummeted at a nearly hyperinflationary rate.
In other words, Russian exports become incredibly cheap around the world. And the country was forced to stop buying goods made by rival economies. This economic disaster had a silver lining; it corrected Russia’s trade balance. And it positioned Russian manufacturers to succeed when the smoke cleared.
These contrarian lessons aren’t unique to Russia. Buying when times are tough and waiting for a recovery is a good strategy worldwide. And it’s especially pertinent in emerging markets like Brazil and China, both of which have had their own hardships recently.
Buying a single stock during a crash can be a risky move. The company might go out of business, leaving you with nothing. But countries don’t go out of business. Remember the lesson that the Moscow bulls taught us about emerging markets: What goes down must come up.
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