2014 is like the new 1998 for Russia. If you dont believe then check this out In 1998 oil was down 40% & Russian stocks were down 90% from peak In 2014 oil is down 40% & Russian stocks are down 75% from peak Both the years are kind of mirror image of each other. Also, oil was the main culprit in both occasions that led to the crisis. The only difference being that the 1998 crisis was also plagued with fiscal imprudence, declining productivity and debt default. 2014 is different in that sense. Structurally, Russia is not facing any issue. It is the oil price debacle that is hurting the most. Basically, Russia is an oil economy. Hence, whenever crude prices fall, the economy stagnates. Until now, oil cartel OPEC was a natural hedge to this risk. Whenever oil prices fell, OPEC used to cut the output to support prices. However, this time around it has chosen not to do so. This has hurt oil exporting countries including Russia. In fact, investors are so worried about the economic state amidst falling oil prices that they have exited the country lock, stock & barrel. Such is the fear on the streets that Russia is by far the cheapest stock markets in the world today with a P/E of 3-4x. Yet investors are unwilling to touch it with a six feet rod! In other words - stocks are on sale in Russia but investors are running out of the store. Let us return to our similarity analysis between 1998 and 2014 to understand why investors could be making a grave mistake! Well, the facts that we displayed in our comparison earlier were incomplete. Here is the true picture of stocks, oil and Russia. In 1998 oil was down 40% & Russian stocks were down 90% from peak In 1999 Russian stocks were up 150%! In 2014 oil is down 40% & Russian stocks are down 75% from peak In 2015 Russian stocks will be up by ___%? As seen, 1999 was a golden year for Russian stocks. And investors who had the courage to invest in 1998 emerged as true winners. They bought when nobody was investing; valuations were dirt cheap and made a fortune. So, can 2015 be the new 1999 for Russia? The conditions today are similar to what they were in 1998. In fact, they are better when one considers that Russia isnt facing any structural issue as was the case in 1998. Valuations too are cheap and there is blood on the street. Perhaps, a fortune similar to 1999 is in the making. One just needs to have the counter intuitive knack to invest now after knowing that valuations are not expensive. And not worry too much about near term risks. As Howard Marks once said, sometimes low quality assets can be safer than high quality assets. And considering the margin of safety in valuations, that could be the case with Russia now when compared to other BRICS nations. A true value investor is someone who can recognize this anomaly so as to invest at the right juncture before valuations become pricey. To be honest, there were many Russia type stocks in the Indian stock markets a couple of years back. That was the time when we too had BUY calls in majority of our services. Currently, valuations have become a bit pricey and hence investors need to be a bit cautious. Source: Equity Master
Posted on: Thu, 18 Dec 2014 15:32:15 +0000
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