As the R in BRIC- the acronym created to describe the next "big" global economies- Russia has been falling flat in its duties as a champion of global and portfolio growth. Stocks within the nation have now retouched November lows and all signs point towards bear market status. In fact, since the global recession Russian equities have lost about a third of their value in the following two years.
Those returns don’t exactly instill investor confidence in Mother Russia.
However, things have gotten so “bad” in the nation that the risk to rewards ratio may be returning to the investor’s favor. For portfolios, the cheapness of Russian equities won’t last very long.
SEE: Riding The Bear Into A Bull Market
A Russian Bear
Overall, the nation is feeling the brunt of several headwinds.
First, geopolitical concerns have weighed heavily on Russia. As the latest debt debacle and banking system issues have griped Cyprus, Russia has suffered too. Russian depositors- especially businesses- make up a large percentage of bank deposits in Cyprus. By the end of 2012, Russian companies have about $31 billion in deposits located in Cypriot banks and more than $29 billion in loans. The recent bailout plan for the small island nation- which includes bank deposit levies- directly effects many Russian companies.
To make matters worse, the strong U.S. dollar has hurt ruble-denominated assets. So far, Russia’s currency has lost about 3% versus the dollar over the course of the year. This was partly due to the issues with Cyprus.
Then there are the issues to consider with its chief energy producer- Gazprom (OTCBB:OGZPY).
Gazprom- one of the largest components in the Russian stock market- saw its market cap dip below $100 billion dollars for the first time since 2009. The state-run energy giant has seen about a third of its market value deteriorate over the past year as CAPEX spending continues to increase while profits and dividends for investors decline. Given its importance as a tool for the state to collect royalties as well as its chief standing in Russia’s Micex index, Gazprom’s decline has far reaching implications.
Given all of these concerns, it is no wonder why investors yanked more than $393 million out of Russian mutual funds the week of April 10th. According to EPFR, this is the worst weekly outflows since September 2011.
SEE: Understanding BRIC Investments
Can’t Get Any Worse
All of these factors have sent Russia into a spiral, and has made the nation’s equities markets the cheapest in decades. The MSCI Russia Index currently can be had for a forward P/E of just 4.24 and a price-to-book ratio of 0.81. That’s less than half of what the broad iShares MSCI Emerging Markets Index (ARCA:EEM) is going for. Yet, there’s even cheaper examples. Gazprom trades at 2.9 times estimated earnings, while Chinese state-own energy firm CNOOC (NYSE:CEO) trades at roughly triple that amount.
All in all, you can’t get much cheaper than Russian equities.
While that fact doesn’t mean they’ll rise, the rewards certainly outweigh the risks at this current time. That means investors may want to consider adding Russia to their portfolio.
The Market Vectors Russia ETF (ARCA:RSX) first mover status into the nation has benefited the fund, as it has garnered over $1.1 billion in assets. The ETF tracks 48 different firms including steel maker Mechel OAO (NYSE:MTL) and cellular phone operator Mobile TeleSystems OJSC (NYSE:MBT). The funds first mover status has also helped with trading volume as RSX is one of the most heavily traded ETFs period. More than 3 million shares trade hands each day. Expenses for the fund run at 0.62%.
Investors also may find the iShares MSCI Russia Capped Index (ARCA:ERUS) or the Direxion Daily Russia Bull 3X Shares (ARCA:RUSL) compelling choices as well. The iShares fund offers a concentrated portfolio at just 28 holdings- meaning each stock has more weight on returns, while the Direxion ETF offers leverage to boost returns in the short run. That could be a big benefit to investors as Russian equities may have nowhere to go but up.
SEE: Building An All-ETF Portfolio
The Bottom Line
Russia has been a disappointment over the last few years. So much so that stocks within the nation are approaching ridiculously cheap levels. For investors, the nation’s equities could be one of the best bargains and offer a great risk-to-reward ratio for the rest of the year.
At the time of writing, Aaron Levitt did not own shares in any of the companies or funds mentioned in this article.