Interesting energy play
There are a number of very good and obvious reasons Russia should trade at a discount: questions surrounding its long-term political stability, a lack of transparency and less-than-stellar corporate governance, to name a few. That said, it’s worth pointing out that these issues are not new. Despite the recent protests, it’s not clear that Russia is any less stable than it was in 2010 when the stock market traded for over 20x trailing earnings.
At the same time, some things have actually improved. Inflation is expected to be 3.70% in 2012 and a similar level in 2013. This marks a significant improvement from 2011 when inflation was over 8%. While growth is expected to slow this year, from 4.3% in 2011 to 3.70% in 2012, this is a relatively mild slowdown compared with other emerging markets, and growth is expected to stabilize in 2013. Finally, unlike many developed markets, Russia runs both a current account and budget surplus and has little to no any external debt.
Again, Russian equities come with more than a few caveats. The market is volatile – much more so than even other emerging markets – and is heavily exposed to oil prices (roughly 50% of the market cap comes from Oil & Gas companies). While they’re not for everyone, investors that are looking for a more aggressive, as well as cheap, play on emerging markets may find Russia an interesting option.
Russ Koesterich, CFA, is the iShares Global Chief Investment Strategist.