THE RUSSIAN STOCK MARKET CRASH AN OPPORTUNITY?

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Is there blood in the streets in Russia?

As I am writing this, the Russian ETF lost 12% in one day. As many value investors know, you need to buy stocks when there is blood on the streets so I have had many questions whether this is an opportunity or a trap. Let’s take a look at what is going on, give a fundamental perspective and a stock market perspective on investing in Russia.

What happened over the weekend

On Friday, Trump designed sanctions on 7 Russian oligarchs and 12 companies they own or control, 17 Russian government officials and a state-owned Russian weapon trading company. The reasons are, according to Treasury secretary Mnuchin that the Russian government engages in a range of malign activity around the globe. So, U.S. persons are generally prohibited from dealings with them where also an non-U.S. person could face sanctions for facilitating their transactions. The companies affected are: Norilsk, Gazprom, Renova and Rusal among those traded on U.S. stock exchanges where its CEO Deripaska who is investigated for money laundering and accused of treating part in extortion and racketeering.
And I thought that in the U.S. you are not guilty until proven otherwise in a courtroom.

Nevertheless, this is exactly the risk I have been discussing when investing in Russia. Even if the cheapest stock market today, it is so for a reason. If all holders of the ERUS ETF from the U.S. or from Europe are forced to sell their holdings because facilitating Deripaska and others with capital the price will be very low. So, investing in Russia is a political thing but as always, if you don’t have any constrains from Trump’s sanctions, it is also an opportunity. Let’s take a longer term look
In the 2014/2015 period the Russian ETF lost 50% on lower oil prices and sanctions. Then there was a bit of a quiet period and slowly people have been forgetting about the risks with higher commodity prices as the Russian ETF is 37% oil related. However, those who bought when there was blood on the street did well with a 50% return since January 2016. The key now is to see whether there is blood on the streets now and whether the sanctions will have an impact on the actual businesses and your ownership. The best way to look at whether there is blood on the streets is to look at fundamentals.

Fundamentals

ERUS’s PE ratio is 6, the price to book value is 0.8 and the yield is 5.7%. However let’s take a lookout what happened in the last round of sanctions!

Sberbank, the largest Russian bank had a PE ratio of 2 if I remember well in 2015 and was trading at below $5.

[scottscriticalmass]

Love the comment... "to pay for their luxury lives and their many wives.' Classic!

I didn't realize there could be forced selling for U.S. holders of Russian stocks. Very interesting! Always learning from Sven... Cheers

[dinosgura]

This channel is an orgasm. Complimenti Dottò!

[sukyOdufuwa]

Hello Sven, Thanks for your awesome investing materials. Which brokerage would you recommend for someone looking to buy individual stocks in Russia?

[slavomirmichalenko]

McCain described Russia as a gas station run by mafia. It is certainly a tricky environment to do business or invest in.

[ricardogarcia]

Hey Sven, which books do you recommend for modern financial analysis? like security analysis in the 21th century. Because accounting rules and gimmeckery have obviously evolved since Graham.

[ankitgambhir]

Hi Sven
Regards

No Russian stocks at the moment. I feel 4 to 5 stocks in one's life are enough to make money or live on stocks.

[pavellikhachev]

Trade wars are easy to start and difficult to end. I think that political and legal confrontation will continue. Russian authorities won't make an acquiescence, because they don't want to look weak. So there might be another portions of negative that would scare investors in the future. Don't get me wrong. I'm not a pessimist, rather rational optimist. I see that despite this trade war and political tentions MICEX index went from 1400 in 2014 to 2170 at this moment (55% increase for 3, 5 years).
But also for the long term perspective there might be other headwinds for MICEX index. First, if there will be recession in the US (for example, if investors will decide that p/e ratio equals 25 is too much for S&P500) all the markets will go down, even those that have very low multiples. Second, we have to remember that MICEX index includes many gas & oil companies. Not only that oil is cyclical, but if electric cars will become a reality... It will reduce demand for oil. Even small fraction (let's say, electric cars get to point of 5% of all the cars in the United States) can reduce oil price severely because investors also will be looking for the future growth of dispuptive industry. What if solar energy will be growning? The same. Also keep in mind that not only Gazprom wants to sell natural gas to Europe. In Texas there is also Cheniere Energy that preparing to transport liquefied natural gas. It would lower the gross margin.
And by the way... What about currency risk? Not only MICEX index went down 8%, but also the price of USD/RUB went up for 10%.

[Youssefkhoukhou]

great as always Sven .
but what is the platform that you use to see european stocks?

[StarTeamVideo]

Dear Sven, can you make a video on rosneft ? Thanks in advance

[liugng]

Hope the forced sale would not happen, does the forced sale of equity happened before?

[alessandrofmeier]

It's maybe less risky to buy Vekselberg's Swiss companies right now. For example Sulzer. There is a fire sale ongoing.

[nv]

I think markets will go up forever. I am also buying some silver :P

[spasserboy]

Your videos are awesome! Keep it up Sven! :-D

[Martin_M_]

I hold some Gazprom stocks. They are this ADR stocks hosted in the USA.
What I know this is the only way to trade russian stocks with a european broker.?
Do you see any risks that this stocks will get liquidated by this US banks providing it?

[davidmostl]

You mentioned a 2 sigma drop. How do you get the sigma?

[ryang]

Confused. I can be forced to sell norilsk?

[dbielenberg]

Russia is among the best investment opportunities, but you point out the risks very well. Politics are truly disgusting, too. Thanks, Sven.

[extrof]

How do I invest in international markets without using ADR

[InvestingwithJYK]

I wonder where you found the information regarding forced sale? Or you were just pointing out a possibility?

[martinmaas]

I would be very surprised if US citizens are forced to sell certain stocks, as that would be a challenge to private property -- but that situation would certainly provide an excellent buying opportunity. Regarding financing, companies such as Norilsk are traditionally financed in London, where there is also the London Metal Exchange. I doubt British bankers would like to follow the US in a second cold war, as they have a lot to lose if they just get their market share taken up by China, which is a natural place for commodity trading. Regarding Norilsk, they have an investment grade rating, and in January they issued a couple of billion dollars of Eurobonds at a Libor rate + 1.5%, which is an excellent rate. Also, Russia has significant international reserves, I bet the government will use them to rescue their companies if they get into trouble due to sanctions. Of course, I agree that stock prices cannot be trusted to remain at this levels, no matter how cheap, and should be only purchased on a very long term horizon with a focus on the dividends. Regards!