The excitement of the Winter Olympics in Sochi is certainly being over shadowed by various issues in Russia. And no, I’m not talking about the various construction woes plaguing the games. This time it’s all about the Russian stock market.

As investors have fled emerging markets and funds like the iShares Core MSCI Emerging Market (NASDAQ:IEMG) in spades, Russia has been hit particularly hard. A falling rubble, corruption and the general distain for the nation has caused investors to dump the BRIC-nations from their portfolios. Overall, the Russian stock market is sitting near historic lows.

However, as they say “be greedy, when others are fearful.”

For investors, the cheapness of Russian stocks is certainly tempting. And for those with longer timelines, the time to buy in could be now.

Worst Start In Six Years

The last few years hasn’t been kind to investors in Russia. As the BRICs began to crack, Russia has seen prices for its equities fall pretty hard. According to index provider MSCI (NASDAQ:MSCI), over the last three years, Russian stocks have lost about a third of their money. Small-caps in the nation have fared even worse-plunging about 60% in the same time frame.

Those returns continue to get worse for Russian stocks. Since the start of 2014, the Moscow-based MICEX Stock Market Index has fallen by more than 4.8%. That’s the worst yearly start for the stock market index since the crash of 2008.

The culprit has been a combination of various forces working against Russian equities. First, economic growth in the nation didn’t live up to expectations in 2013. Overall, GDP growth in Russia was half of what it accomplished in 2012 and was significantly under analyst estimates. Meanwhile, Bloomberg reports that the ruble has fallen around 7.2% this year. That makes imports rather expensive for Russian retailers. Finally, the Fed’s recent decision to abandon its easing programs isn’t helping risk assets like Russian stocks.

With those negatives in place, it’s easy to see why investors have pulled roughly $600 million from Russian mutual funds since 2011.

Yet for those willing to think outside the box, Russian equities might make a bit of sense. While commodities may have taken a breather, the long-term demand picture is still up. The nation is one of the largest producers of oil and natural gas. Not to mention it is rich in coal, various metals and timber. Aside from commodities, Russia is one of the largest consumer markets on the planet- with a huge growing middle class population. Adding in recent infrastructure spending and policies designed to spur innovation, Russia is quickly becoming more than a one trick pony.

And its dirt cheap. The Russian stock market can be had for a forward P/E of just 5. The rest of the world- as represented by the iShares MSCI ACWI Index (NASDAQ:ACWI) -can be had for 13 times earnings. Meanwhile, Russian stocks are currently trading at a 70% discount to book value.

Buying Hated Russian Equities

Given that the rewards certainly outweigh the risks at this current time, investors may want to consider adding Russia to their portfolio. The easiest way is through the Market Vectors Russia ETF (NYSE:RSX).

The $900 million ETF is still the most popular option for adding Russian exposure and tracks 48 different stocks- including internet search engine Yandex (NASDAQ:YNDX) and steel producer Mechel OAO (NYSE:MTL). Over the last five years, RSX has managed to produce a decent 20% annual return. However, the recent sell-down in Russian equities has the fund hitting new all-time lows. Expenses for the ETF run 0.62% a year. Another option, is more concentrated iShares MSCI Russia Capped Index (NASDAQ:ERUS) -at just 23 holdings. That concentrated portfolio means each stock has more weight on ERUS’ returns.

Perhaps the biggest values can be found in Russia’s energy giants. According to J.P. Morgan (NYSE:JPM), a 10% decline in the ruble, increases Russian energy stocks earnings by 7% and net income by 11-13%. That means natural gas giant Gazprom (OTCBB:OGZPY) and oil producer Rosneft (OTCBB: RNFTF) could be huge buy. The duo currently trade for peanuts- with P/E’s of 2.46 and 4.02, respectively. However, they won’t stay that cheap for long.

The Bottom Line

Returns for investors in Russia have been a complete disappointment over the last few years. The recent asset flight has only exacerbated the situation. Yet, stocks within the nation are approaching ridiculously cheap levels. For contrarian investors, the nation’s equities could be one of the best bargains and offer a great risk-to-reward ratio. The previous picks- along with SPDR S&P Russia ETF (NYSE:RBL) –make ideal selections to play Russia.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  2. Mutual Funds & ETFs

    ETF Analysis: Guggenheim Enhanced Short Dur

    Find out about the Guggenheim Enhanced Short Duration ETF, and learn detailed information about this fund that focuses on fixed-income securities.
  3. Mutual Funds & ETFs

    ETF Analysis: iShares US Oil&Gas Explor&Prodtn

    Learn about the iShares U.S. Oil & Gas Exploration & Production ETF, which provides an efficient way to invest in the exploration and production sector.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Morningstar Small-Cap Value

    Find out about the Shares Morningstar Small-Cap Value ETF, and learn detailed information about this exchange-traded fund that focuses on small-cap equities.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI KLD 400 Social

    Find out about the iShares MSCI KLD 400 Social exchange-traded fund, and learn detailed information about its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares Agency Bond

    Find out about the iShares Agency Bond exchange-traded fund, and explore detailed analysis of the ETF that tracks U.S. government agency securities.
  7. Mutual Funds & ETFs

    ETF Analysis: Guggenheim BulletShrs 2018 HY CorpBd

    Find out about the Guggenheim BulletShares 2018 High Yield Corporate Bond ETF, and get information about this ETF that focuses on high-yield corporate bonds.
  8. Mutual Funds & ETFs

    ETF Analysis: PowerShares DWA SmallCap Momentum

    Find out about the PowerShares DWA SmallCap Momentum Portfolio ETF, and explore detailed analysis the fund's characteristics, suitability and recommendations.
  9. Mutual Funds & ETFs

    ETF Analysis: WisdomTree Bloomberg US Dllr Bullish

    Explore an analysis of information on the WisdomTree Bloomberg U.S. Dollar Bullish Fund, a currency ETF that tracks the overall performance of the U.S. dollar.
  10. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
RELATED TERMS
  1. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  2. Brazil, Russia, India And China ...

    An acronym for the economies of Brazil, Russia, India and China ...
  3. Caribbean Community and Common ...

    The Caribbean Community and Common Market (CARICOM) is a common ...
  4. Caribbean Development Bank (CDB)

    The Caribbean Development Bank (CDB) is a multilateral financial ...
  5. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  6. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  4. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!