I recently attended the Chartered Financial Analyst (CFA) Institute’s annual forecast dinner in Denver, where the keynote, from a major asset manager, reviewed equity valuations across the world. He commented that there are not many equity regions that look particularly attractive compared to their histories, unless one is buying Russian energy companies.
His remark generated a chuckle from the audience, showing deep skepticism about such a position today. But that’s not the whole picture. The CFA Institute surveys its 120,000 global members annually; for 2015, the top four countries that members favored were the United States (by a large margin), China, India and Russia.1 So, despite the skepticism, a number of strategists are still eyeing the depressed Russian market.
Steep Discounts
“Most great investments begin in discomfort. The things most people feel good about—investments where the underlying premise is widely accepted, the recent performance has been positive and the outlook is rosy—are unlikely to be available at bargain prices. Rather, bargains are usually found among things that are controversial, that people are pessimistic about and that have been performing badly of late.”
—Howard Marks, chairman, Oaktree Capital Management, Renown Value Manager
Russia is currently selling at an extremely discounted valuation. It is currently out of favor due to the huge collapse in oil prices—many of the large Russian companies are in the oil business—and as a result of the sanctions Russia is enduring over the political situation in Ukraine.
When we evaluate the median P/E ratios of major equity regions over the last 20 years, the broad MSCI Emerging Markets Index is trading very close to its longer-run historical median P/E ratio. But Russia stands out, both for its low single-digit number and because it is selling at nearly a 50% discount to its historical median level. Of course, earnings may fall in the next year, given the collapse in oil prices, but even a 50% fall in earnings would leave Russia selling at a large discount to the rest of the emerging markets.
How Attractive Are Valuations in Russia?
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Russia: Performance Standout of 2015
Russia has started off 2015 as a leader in global equity prices. Russia has led all emerging market countries in the first two months of the year.2 Much of the rebound is from stabilization in the currency, which has rebounded based on optimism over settlement talks and a fragile peace that is holding in the Ukraine.
Companies or countries are very often attractively priced for very good reasons. Referring to Marks’s words, Russia is a place of discomfort for investors today. But some of the very best returns over the long run can be found from such dislocations in the market. What strategies are buying Russia today?
Emerging Market Strategy That Allocates to Value
WisdomTree’s Emerging Markets Equity Income Fund (DEM) tracks an Index that employs a rules-based process to allocate weight where it finds value every year—by selecting companies ranking in the highest 30% by dividend yield and setting weights according to the dividends that the companies pay. This strategy does not go with consensus opinion on a market; instead, it allocates to where prices are attractive relative to dividend payments.
The strategy has a compelling long-term track record, beating 92% of its peer group since inception, but it has seen disappointing short-term performance, given the recent over-weight to Russia. That said, if the peace in Ukraine holds and oil prices begin to stabilize, DEM may prove to be one of more rewarding allocations among global equities.