2018 has been a rough start for Russia. First, it started with the poisoning of the former Russian double agent Sergei Skripal and his daughter Yulia Skripa on March 4th. UK responded by expelling 23 Russian diplomats and another fourteen European EU members followed by further expelling Russian diplomats. President Donald Trump backed up UK and expelled 60 diplomats.
Second, as if that wasn’t enough, on April 11th, Trump responded to Russia’s attack on Syria by tweeting.
The total market consequence is that the Russian index has lost tremendous value in a short period of time. The MSCI Russia Index, which tracks the Russian equity market, is down -16.49% in just one month, and the index as a whole is down -8.85% YTD. Even if you invested 3 years ago, your total return would be merely nothing, only 1.12%.
To give you a comparable picture, during the recession, which was one of the worst financial crisis we have ever had, the S&P500 lost 55%. This means that the MSCI Russia Index has already plunged 30.1% of that drop, and there is no reason at all to think that it’s over. The politic risk is extremely high which makes any investment highly risky, but then again, with risk comes reward.
The Russian market is very special in the sense that its very concentrated. The Oil & Gas sector weights more than 65% in the index and financials sector accounts for 22.3% of the index. Basic materials weight 7.7% and consumer services, which is often thought at the safest sector in a volatile market, only weights 5.6%. Consequently, any investment in the MSCI Russia Index means heavy exposure to risky and uncertain sectors such as energy and finance.
The price to earnings ratio, which is an indicator for how attractive investments are to investors, is very low. The trailing price to earnings is 7.45 and even more interestingly, the projected P/E is only 6.43. If we compare, the S&P’s P/E is 16.1 which clearly is much more expensive. Furthermore, the P/B is 0.78 for MSCI Russia Index and the average yield is 4.14%, double that of the S&P500. So, it’s cheap, but that doesn’t necessarily mean its investment-worthy.
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Here at Library for Smart Investors, we focus in doing profound and objective investment analyst which can provide attractive opportunism for you as an investor. At the moment, the politic risk does not make up for the reward one might earn by investing in the MSCI Russia Index. We are still far away from all time low levels as in 2009 and 2016.
However, that doesn’t mean that one can’t find attractive opportunities in common stocks.
United Company Rusal Plc (RUSAL.PA), one of the largest alluminium-producers in the world recently announced that the sanctions against Russia might cause debt-stress. This is great news for other aluminum companies competing in the same market. The American aluminum company Alcoa’s (NYSE:AA) share price has already jumped 20%, but the Norwegian company Norsk Hydro (NYSE:NHYDY) hasn’t experienced any significant change it its stock price. Investors would be wise to follow the situation closer. At one point, even risky investment becomes too cheap. The question is when it’s time to put the money to work. Small and frequent investments are probably smarter than single investments in this risky market.
Disclaimer: The author owns no positions in the mentioned stocks
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