As expected, Vladimir Putin claimed victory in Russia’s presidential election Sunday.
Assuming the disputed election results don’t lead to greater civil unrest, there are four reasons why I continue to advocate over-weighting Russian equities through instruments like the iShares MSCI Russia Capped Index Fund (ERUS).
Valuations: While Russian stocks have been stand out performers year to date, they still are a good value. The MSCI Russia index is up 25% in U.S. dollars this year so far thanks in part to a 10% appreciation of the Rubble. But despite the rally, the market is still trading for less than book value at just 5.5x trailing earnings. This is cheap even by emerging market standards.
Oil Prices: Unlike most Asian emerging markets, Russia should actually benefit if oil prices continue to rise given that energy makes up more than 50% of the MSCI Russia Capped Index’s market capitalization. In other words, over-weighting Russia is one way to play the prospect of oil prices remaining elevated.
Economic Outlook: This year, Russia should post relatively strong growth of 3.5% and should also likely see inflation drop to less than 6% from 8.5% last year. In addition, it’s important to note that Russia’s debt is less than 10% of its gross domestic product, which is a very low level of debt.
After the Election: Putin’s apparent victory isn’t likely to lead to meaningful reform, but Putin is likely to increase fiscal stimulus in the near term. This should help boost Russia’s near-term growth prospects, giving the country an edge in today’s slow growth world.
In short, though I generally don’t like markets in Eastern Europe, Russia is an exception. While it’s a volatile market with significant long-term issues, Russian equities can move higher in the near term.
Disclosure: Author is long ERUS.
In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Securities focusing on a single country may be subject to higher volatility. Past performance does not guarantee future results.