Seeking Alpha

Investors Can Now Trade The Cheapest Market On Earth

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Includes: ERUS, MBT, OGZPY, RSX, RSXJ, RUSL, RUSS, SBRCY
by: Paulo Santos
Paulo Santos
Long/short equity, arbitrage, event-driven, research analyst
Summary

There's one market which stands cheaper than all others.

Oddly, this market also often carries better fundamentals.

There's just one catch. And the catch might have just started disappearing.

There you are, probably trying to decide whether to buy a gigantic market cap at 20x EV/EBITDA, or considering whether a 2% yield is better than having money in the bank. Or maybe you got tired of it all and went passive. You just picked up an index fund that assures you to participate on the market’s upside at 23x earnings and 1.8% dividend yield, late in the longest-running positive economic cycle in history.

Yet, at the same time, across the world, a market sits untapped and unloved. There, you don’t have to fight with other TINA (There Is No Alternative)-crazed investors. There, very few people are aware of the market’s daily swings. Interest rates are high and money sits in deposits, not caring about the stock market.

That other market is Russia. Due to a general lack of interest, high interest rates and general skepticism in the West, Russia’s stock market trades for just 5.7x earnings and carries a 6.4% dividend yield. It can truly be called the cheapest market on Earth. I already had compared Russia to Brazil and China, two other large emerging markets. Back then, Russia already came off as the best destination for your money.

Source: Starcapital.de

Not only is Russia extremely cheap, but the country also carries excellent fundamentals. Russia has a high trade surplus, high balance of payments surplus, very low government debt and the government also runs at a surplus. This is a positive combination that’s hard to find anywhere in the world, yet it’s found on the cheapest market on Earth.

Moreover, one of the most important factors when it comes to equities isn’t just how cheap they are when you buy them, but also where interest rates are, and where they’re headed. It so happens that in Russia interest rates are both high and heading down. This is the best possible combination for equities, and yet it’s found on the cheapest market on Earth.

Source: Tradingeconomics.com, Russia's benchmark one-week repo rate

There has to be a catch, of course.

The Catch - Difficult Access

If you fire up your discount broker’s trading software, you’ll immediately find the most obvious catch when it comes to Russia. The broker will trade lots of stocks in North America. It might even give you access to Europe. But when it comes to trading Russia (Moscow Stock Exchange) directly, it’s more likely than not that you won’t have the option to do it.

For sure, there are some alternatives, like:

  • Trading Russian ADRs quoted in the U.S. markets, like Mobile Telesystems (MBT).
  • Or trading Russian unsponsored ADRs also quoted in the U.S. markets, though over the counter. You’ll recognize Gazprom (OTCPK:OGZPY) or Sberbank (OTCPK:SBRCY) as examples of this.
  • Or, though already harder, trading Russian ADRs listed in the London Stock Exchange.

The thing is, some of these alternatives will have low trading volumes and high spreads, depending on the stock. Plus, they won’t make most Russian stocks be available to Western investors. Or, of course, you could use a full service broker to trade Moscow directly, but that would likely be very costly unless you were trading high volumes.

That Was Up Until Recently

Something did change recently. A U.S. discount broker – one which I think is actually the best discount broker – has just made direct Moscow trading available. That was Interactive Brokers (IBKR).

Hence, from now on and for someone having an account with Interactive Brokers, it’s possible to trade stocks in Moscow like you would in the U.S. or European market.

What Does This Mean For Investors?

This makes a significant difference for a value investor. As it turns out, there are several interesting value and speculative stocks in Moscow that you can’t get anywhere else. Stocks with very low valuation multiples, decent prospects and, at times simultaneously, even paying high dividend yields. These are the kinds of opportunities which have vanished from the U.S. market decades ago (except during deep crashes).

In the U.S. market, investors are presently forced to choose between paying low multiples (but often still several times higher than in Russia) for disgraceful fundamentals, or massively high multiples to get quality. Yet, at the same time, in Russia, you can get both quality and low valuation multiples in the same stock. Indeed, the whole Russian market trades below where even distressed U.S. companies trade.

Conclusion

It’s a very significant development for value investors that it’s now possible to invest directly in Moscow-quoted stocks. Several new and interesting high-quality companies now become available with decent liquidity.

Furthermore, many Russian companies are not only extremely cheap, but their fortunes are not as correlated with developments in the US market. They thus can serve a role in diversifying equity risk.

Of course, Russia continues to have two potential weaknesses:

  • It has stagnated demographics, where a growing population greatly helps the economy and companies in general.
  • The Russian economy is very reliant on commodities and energy in particular (natural gas, crude). Of course, the rapidly expanding U.S. energy production presents a risk for energy-reliant economies and companies everywhere.

Disclosure: I am/we are long MBT, OTHER RUSSIAN STOCKS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.