Trading based on geopolitics has a long and storied history. Legend has it that in 1815, Baron Rothschild made a fortune by buying stocks before news of the British victory at Waterloo reached London (although how much he made is disputed). For a more recent example, Russian stocks have racked up eye-popping gains for investors since the fall of the Soviet Union, albeit with extreme volatility. The big swings provide great opportunities for investors to buy low and sell high and diversify their portfolios in the process. As the title of this article conveys, there has always been a cultural fascination with Russia–from the James Bond movies to the extensive cable news coverage of Russia's military in the West. Russian stocks don't get as much love, however, despite their returns, having some of the lowest valuations and highest dividends in the world.
Russia's largest bank, Sberbank (OTCPK:SBRCY) has returned over 50% in four out of the last seven calendar years. As it's the largest bank in Russia and is partially owned by the Russian government, Sberbank is an excellent proxy for the Russian economy at large. Sberbank had a terrible year in 2014, falling nearly 70% as Russia seized Crimea and was hit by US sanctions. But in the next two years, the stock tripled in value.
It may be difficult to identify the bottom in Sberbank, but the stock is attractively priced at the moment with a PE ratio of roughly 5.0. I believe the returns could be similar going forward for Sberbank, with the potential for a 100% return or greater over the next 12-18 months, including dividends. With the price of oil surging, Russia's low debt-to-GDP, and Russia's economy hardened by years of sanctions, the fundamentals for Russia's economy actually look quite good. While Sberbank is nearly certain to fall further if Russia takes additional military action in Ukraine, worst-case fears are unlikely to be realized militarily, politically, or economically.
Sberbank is crashing again in price with fears over a Russian invasion of Ukraine, which begs the question of whether the big selloff is an overreaction, an underreaction, or about right. The history of Russian stocks in the post-Soviet period points towards the move in Sberbank being an overreaction – price crashes have always been followed by gains.
Investing in Russia isn't glamorous like finding the next Microsoft (MSFT) and watching your money grow. But the country needs capital to grow its economy and continue to improve living standards, which means that long-run returns are good, valuations are low, dividends are high, and you can make multiples of your original investment if you get the timing right. Russian stocks have some of the highest dividend yields in the world, with Sberbank yielding in the 7-8% range. Below is a close-up of the fall of Russian stocks over the past few months. SBRCY has fallen over 40%, and over 10% today alone as of my writing this.
It does bear noting that there are millions of lives at stake from geopolitics that we as investors will never see up close and in person. Last week, as I played golf under crystal blue Florida skies, more Russian tanks were rolling through the snow to their positions near the Ukrainian border. There's a lot of uncertainty right now, but about some of the big questions in geopolitics, I'm an optimist for a more peaceful and prosperous world. Russia and the United States have had at least some tension for as long as any of us have been alive, and despite the posturing, living standards in Russia (and the US, for that matter) are gradually increasing.
Putin has been in power since 1999, and in the grand scheme of things, he hasn't done anything majorly provocative to NATO. On the other hand, NATO has been somewhat provocative to Russia by considering giving membership to Ukraine and Georgia. Ukraine is a core Russian strategic interest, but it simply isn't a core interest for America. Washington is not going to risk a nuclear war over Ukraine, with a household income of less than $3,000 US dollars per year, systemic corruption problems, and minimal oil resources. In hindsight, even thinking about offering NATO membership to Ukraine was a bad idea. For these reasons, I think the West is misguided here in temporarily placing focus on Ukraine above core strategic US interests such as East Asia and the Persian Gulf, where war or supply disruptions could do real damage to the global economy by cutting off crucial commodities like oil or semiconductors. And even if Ukraine was for some reason a core US interest, what leverage would the US even have with Russia controlling the supply of gas to all of Eastern and Central Europe? Almost none.
If anything, Putin has shown the world in the last 20+ years of his rule that he is deeply strategic and won't pick a fight he can't win. Occupying all of Ukraine would likely be an expensive quagmire for Russia given how deeply unpopular Russia is in Kyiv, but some analysts have thought that taking some of the Russian-speaking areas in the southern and eastern parts of the country may be Putin's aim. The important thing to realize is that Russia is flexible in its policies and Putin is not an irrational madman. Time will tell whether I'm wrong about this, but I don't think I will be.
The main fear, of course, for investors, is more sanctions. Sources close to the German government have indicated that the most severe sanctions are likely off the table. From their public statements, Germany probably won't block the Nord Stream 2 pipeline, which is needed to help bring down the spiraling cost of energy in Europe. And it appears that one of the largest shareholders in Sberbank is none other than the cash-rich government of Norway. In addition, the largest owners of Russian stocks are American investors. Is the West being hypocritical here by saying one thing and doing another? Perhaps a bit. While promoting democracy is a noble goal, the lesson in Ukraine may be that Washington needs to respect Russia's sphere of influence in order to have Russia's help in maintaining world peace, particularly in the Middle East. One risk of sanctioning Russia too heavily is that it could drive them into the arms of Beijing, which likely played into the informal indications to take the most severe sanctions off the table.
Russian stocks are crashing on geopolitical fears, and Sberbank is crashing along with them. With the panic in Russian stocks, Sberbank looks like a good buy, although it might soon be even cheaper. I bought a little SBRCY this morning as of writing this and would consider buying more if the crash continues. If SBRCY gets hit with more sanctions or the US government forces us to divest, I'll live with having taken the risk. Past history shows that total ruin is not likely to be the case, however, and I don't believe today's Russia is the enemy it's made out to be in the mainstream media. Sberbank may be a falling knife at the moment, but the fundamental value appears far higher than the current market price.
Agree or disagree with my Sberbank thesis? Feel free to add your thoughts in the comment section.
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Disclosure: I/we have a beneficial long position in the shares of SBRCY either through stock ownership, options, or other derivatives. 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.