Why It’s Time to Buy the Cheapest Market in the World

by Carl Delfeld

To put it mildly, there is not much I like about Russia.

A couple of weeks ago, I highlighted to you Russia’s abysmal record on economic freedom. It ranks a pathetic #144 ranking in the 2012 Index of Economic Freedom.

Political freedom? What can you say about a government that puts a renegade band in jail for two years just because it doesn’t like their lyrics?

Still, I had to smile when I checked my Pacific Rim country portfolio this week and saw that the Market Vectors Russia ETF (NYSE: RSX) was the top recent performer - up around 18% since being added to the portfolio just a few months ago.

Given my antipathy towards the country, why on earth I did I add it in the first place?

It was, and remains, a dirt-cheap stock market.

According to the Financial Times, the Russian market is now trading at just 5.7 times earnings compared to 16.9 times for India, 15.1 times for the S&P 500 index, 19.4 times for the Philippines and 18.4 times for Mexico.

Is Siberia the Next Canada?

Why is it so cheap? Well in addition to the reasons I have already highlighted, Russia is one giant commodities play – an area out of favor with investors at the moment.

Roughly 70% of the Russian stock market is made up of resource stocks. The country is the world’s largest oil producer and the second largest oil exporter. On top of this, Russia is the world’s second largest natural gas producer and exports twice as much as its nearest competitor, Norway.

So when energy resource stocks are moving – so is the Russian market. Though, I have noticed that it always seems to trade at lower valuations than its peers. It’s also interesting to note that Russia has outperformed China over the last decade with a compounded return measured in US dollars of 325% versus China’s 247%.

Russia Finally Joining the WTO

There are also some developments that have recently made me watch Russia even more carefully…

First, just last week, after 19 years of painful negotiations, Russia finally joined the World Trade Organization (WTO). According to the World Bank, WTO membership will drive medium-term GDP up by 11% and could boost its growth rate by up to 3% per year. Under the terms, Russia must commit to a series of regulations that promise to energize domestic growth and encourage foreign investment.

In addition, maybe up to now protected industries will get moving through a dose of badly needed international competition.

Second, Russia is steadily shifting its attention and resources to its Pacific Rim frontier. Anchored by the city of Vladivostok, Russia is stepping up its trade and investment outreach to countries such as China, South Korea and Japan.

Why It’s Time to Buy the Cheapest Market in the World

(Source: Encyclopedia Brittanica)

In fact, over the past five years, bilateral trade with Japan has already doubled and trade with South Korea has tripled. This is just the beginning as the Pacific century unfolds.

In addition to ample supply of energy resources, Russia has geography in its corner. It takes only 2-4 days to get raw materials from Russia’s Asian frontier to China compared to weeks for many of its competitors.

Finally, despite the bad headlines, the Russian economy is chugging along pretty well with about a 4% growth rate. One of the largest food retailers and BMW sales are both growing at a 30% annual clip.

Pundits are always warning investors about “falling in love” with their stocks. I say be careful not to hate them too much – you will miss opportunities.

Good Investing,

Carl

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