From Russia With Pain
(From BARRON'S)
By Vito J. Racanelli
Suffering is a theme traditionally associated with Russia by her great novelists. The litany of bad economic news coming out of the country in the past 12 months could fill a book, but unfortunately, it isn't fiction.
At a recent 650, the RTS dollar index of Russian stocks is down some 75% from its high less than a year ago, one of the world's worst performances. This is a daunting investment environment, which combines twin evils: emerging-market economic woes and property-expropriation risk.
Russia is expected to see gross domestic product drop 2% this year, after many years of strong growth. Unemployment, now 8%, is rising, while real wages fell by about 4% last year. The ruble has plunged 50% against the greenback, and domestic corporate-earnings growth is uncertain at best. Russia has failed to diversify its economy away from natural-resources exports like oil, gas and metals.
Yet these are only cyclical issues. A worse risk remains -- the weak rule of law, accompanied by a rise in state meddling in economic affairs (something now familiar to Americans) and the specter of creeping capital controls. Foreign direct investment in Russia dropped by 15% in the fourth quarter.
Is there any reason to invest in Russia? Only for someone with a time horizon of three to five years -- and steely nerves -- is the country worth a look. Russian equities are inexpensive, and many investors are underweight.
Russia has "world-class assets selling at very cheap prices," says Craig Shaw, who co-manages the Harding Loevner Institutional Emerging-Markets Fund (ticker: HLMEX). Russian stocks sell at about a 50% discount to other emerging markets, based on price/earnings ratios. If you don't trust earnings, the market also is cheap based on price-to-book value, according to Merrill Lynch. It is trading at 0.6 times book value, versus 1.3 times for emerging markets, 1.5 times for Brazilian stocks, and two times for Indian equities.
In certain ways, Russia is better off than some other developing nations, and perhaps even troubled European ones such as Ireland and Spain, notes Harvey Sawaikin of Firebird Management. Russia is solvent and relatively stable -- for now -- and corporate and personal-debt levels are low, he says. In Russia, "you can draw a box around the problems," something that can't be said for some U.S. banks, for example.
Oil prices and the ruble are the key, adds James Fenkner, a portfolio manager at Red Star Asset Management. The opportunity for big gains for investors with a three-to-four-year view exists, he believes; however, "there's no reason to buy" until the ruble and oil prices improve, or at least stop declining. One buy sign, Fenkner says, would be the stabilization of Russian foreign-exchange and gold reserves -- some of which were wasted recently trying to prop up the ruble. But lately, reserves show some signs of stabilizing. Russia has about $380 billion in reserves, among the largest held in the world.
For intrepid investors, giant energy firms like Gazprom (ticker: OGZPY) and Lukoil (LUKOY), food-producer Wimm-Bill-Dann (WBD) and steel maker Severstal (CHMF.Russia) are worth further scrutiny. But the payoff could take a while.
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Dow Jones Wilshire Global Indexes
Region/
Country
DJ Global DJ Global DJ Global Point
Indexes, Indexes, Indexes, Chg. % Chg.
Local Curr. Wkly U.S. $ Wkly U.S. $ on From From
03/20/09 % Chg. 03/20/09 % Chg. 12/31/08 12/31/08 12/31/08
Americas
1953.22 2.05 2248.29 -295.07 -13.12
Brazil
65934170.34 2.64 11552.99 5.41 10365.93 1187.06 11.45
Canada
2768.87 2.57 2586.13 5.74 2712.54 -126.41 -4.66
Chile
4662.54 1.80 2974.75 2.89 2616.73 358.02 13.68
Mexico
12661.31 -1.05 2746.95 2.09 3266.08 -519.13 -15.89
U.S.
7739.20 1.61 7739.20 1.61 9056.67 -1317.47 -14.55
Latin America
4767.89 4.54 4585.01 182.88 3.99
Europe
1701.33 7.50 1980.55 -279.22 -14.10
Austria
1550.98 7.68 1638.80 13.31 1781.96 -143.16 -8.03
Belgium
1880.38 0.58 1987.87 5.84 2146.64 -158.77 -7.40
Denmark
2326.60 0.75 2506.39 6.08 2809.61 -303.22 -10.79
Finland
6565.75 1.70 6204.72 7.02 7697.16 -1492.44 -19.39
France
1809.48 3.18 1937.88 8.58 2271.68 -333.80 -14.69
Germany
1572.95 2.67 1656.78 8.04 2027.58 -370.80 -18.29
Greece
1611.16 5.85 1125.51 11.39 1276.36 -150.85 -11.82
Ireland
1510.19 7.12 1558.85 12.73 1738.85 -180.00 -10.35
Italy
1446.07 7.35 1255.35 12.97 1637.54 -382.19 -23.34
Netherlands
1636.63 2.36 1724.78 7.72 2026.07 -301.29 -14.87
Norway
2216.26 5.11 2077.20 12.74 1921.64 155.56 8.10
Portugal
1589.59 2.32 1458.19 7.67 1549.66 -91.47 -5.90
Russia
706.06 2.15 605.25 5.82 525.41 79.84 15.20
Spain
3012.39 3.59 2392.42 9.01 2958.58 -566.16 -19.14
Sweden
3589.95 0.02 2438.78 5.72 2520.17 -81.39 -3.23
Switzerland
2968.12 1.60 3557.76 7.15 4264.00 -706.24 -16.56
United Kingdom
1601.38 2.38 1236.26 5.76 1405.26 -169.00 -12.03
South Africa
6824.74 3.61 1948.59 7.96 2071.95 -123.36 -5.95
Pacific Region
790.92 6.34 891.57 -100.65 -11.29
Australia
2170.72 3.85 1968.35 8.84 2127.14 -158.79 -7.46
China
1321.90 2.58 1322.47 2.62 1384.83 -62.36 -4.50
Hong Kong
2336.52 1.97 2344.66 2.00 2461.90 -117.24 -4.76
India
894.06 3.32 794.50 5.02 895.71 -101.21 -11.30
Japan
468.92 5.40 608.38 7.42 723.86 -115.48 -15.95
Malaysia
1558.11 1.71 1162.37 3.25 1271.12 -108.75 -8.56
New Zealand
1117.97 1.87 1158.48 8.95 1265.66 -107.18 -8.47
Philippines
1740.52 -0.43 935.22 0.04 952.94 -17.72 -1.86
Singapore
1020.27 1.23 1091.02 3.07 1274.80 -183.78 -14.42
South Korea
2201.70 3.97 1181.66 9.17 1265.50 -83.84 -6.63
Taiwan
1204.12 0.98 918.52 3.06 874.74 43.78 5.00
Thailand
792.18 1.24 529.13 3.05 566.51 -37.38 -6.60
Euro Zone
1821.29 8.89 2191.58 -370.29 -16.90
Europe Developed (ex U.K.)
2007.05 8.40 2381.14 -374.09 -15.71
Europe (Nordic)
2483.27 7.11 2687.17 -203.90 -7.59
Pacific (ex. Japan)
1665.58 5.24 1769.07 -103.49 -5.85
World (ex US)
1277.11 6.75 1444.78 -167.67 -11.61
DOW JONES WILSHIRE GLOBAL TMI INDEX
1511.76 4.47 1735.59 -223.83 -12.90
GLOBAL DOW
1312.82 4.26 1526.21 -213.39 -13.98
Indexes based on 12/31/91=1000.2009 Dow Jones & Co. Inc. All Rights Reserved.
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(END) Dow Jones Newswires |
