With US investors largely focused on domestic matters these days, it can be easy to miss potential opportunities in international investing. One such opportunity that has recently come to our attention is Russia.
Bear in mind, this market comes with a hefty warning label – investors looking to lower the volatility of their portfolio can stop reading here. But for those with a higher risk tolerance, there are three reasons to consider Russian equities:
Cheap valuations
The most obvious attraction of this market is its low valuation. By any measure, Russian equities look exceptionally cheap, both compared to their history and other emerging markets. The Russian MICEX Index is currently trading for less than 6x earnings, compared to a 10-year average of over 9x earnings. While most emerging markets look inexpensive compared to their history, Russia is an extreme case. In the past, Russian stocks have normally traded at a discount of around 30% to other emerging markets. Today, stocks in Russia trade at a 53% discount. Looking at price-to-book, the story is the same. The MICEX is currently trading at a 20% discount to its book value, one of the cheapest valuations in the world.
Surprising profitability
While there are some very legitimate reasons that Russian equities should be this cheap, profitability is not one of them. Companies on the MICEX exchange, have a return-on-equity (ROE) of over 18%. This is in line with both Russia’s long-term average as well as the average for other emerging markets. In fact, when you compare valuations with market profitability, Russia appears to be one of the more under-valued markets globally.