Shiller Says Buy Russia

by: Richard Shaw


Shiller likes Russia, Greece and Portugal.

Russian CAPE ratio 4.6 versus 27.8 for U.S.

Russia is cheap for good reasons.

Shiller likes Greece better than Russia, but he thinks it presents long-term opportunity for contrarians.

Bloomberg reported (January 27):
Nobel Winner Shiller Joins Pimco in Saying Buy Greek Assets

"You can't free yourself from the prison of the zeitgeist unless you become a smart beta person and start mechanically doing investments that don't sound right," said Shiller on Tuesday. It also makes sense to invest in Russian, Portuguese and Italian equities, according to the model, he said.

CNBC reported (January 28):
Shiller sees Greece, Russia investment opportunities

When asked whether he thought that meant investors should buy Russian investments, on a 5- to 10-year basis, he said: "That might be a good strategy.."

He may well be right, but what a strong stomach that would take. Russia is a bad country - highly corrupt, prone to expropriation of foreign oil company assets, prone to jail political opposition and take their assets, actively engages in military conquest of neighbors, militarily fortifying arctic sea region to support very aggressive undersea claims, probing European and US air defenses - while overly reliant on oil and gas exports and currently teetering on recession.

Of course, that has a lot to do with why the valuation of its stocks is so low. If you have 5 to 10 years, as Shiller says (but as very few could endure the drawdowns and volatility along the way); this could be a major capital gains opportunity, if valuations begin to approach world valuation levels.

Caveats and bad news aside. What is so good about Russia?

Star Capital provided these valuation data points for Russia, Greece and Portugal (Shiller's long-term buys).

Clearly, a Russian price to cash flow of 2.7x is attractive relative to an 11.1x ratio for the USA; however, 2.7x is pre-recession data, and 11.1x is for a growing economy. The Russian 10-year CAPE ratio of 4.6x compared to 27.8x for the USA, and 20.0x for developed markets, and 15.0x for emerging markets is appealing.

So, what is actually available within the US to invest in Russia?

There is one mutual fund, a few ETFs and a few individual stocks. Here is the list:

Name Symbol Type
Voya Russia A (MUTF:LETRX) MF
iShares MSCI Russia Capped (NYSEARCA:ERUS) ETF
Market Vectors Russia (NYSEARCA:RSX) ETF
Market Vectors Russia Small-Cap (NYSEARCA:RSXJ) ETF
Mobile TeleSystems OJSC ADR (NYSE:MBT) ST

Here is how they have each performed over several time periods in tabular form:

Here is how they have performed in chart form over the past year:

Here are yield and valuation multiples for the securities.

Personally and professionally, I would wait a while yet on owning Russia, if at all. What if they counter-sanction by expropriating Russian equity held by US or European investors?

I would also go with a fund or index and not individual stocks due to the high level of issue specific risk individual stocks pose in Russia.

However, if Shiller's recommendation resonates positively with you at this time, these are your options for the most part without getting into some very thin pink sheet stocks.

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