Everybody hates Russia – is it time to buy their stocks?

Stocktake: Bitcoin ‘virus’ peaks; Barclays’ equity study; Buffet the billionaire boy

Buy Russia. That's according to GMO, the value investing firm headed by iconic investor Jeremy Grantham. Russian stocks were slaughtered last week, plunging 8.7 per cent on Monday in the wake of new sanctions and growing Syria-related tensions with the US. GMO is especially tempted by controversial gas giant Gazprom as well as Sberbank, Russia's biggest bank.

Sberbank endured an eye-popping one-day fall of almost 22 per cent. GMO sees this as a huge overreaction driven by the fact London-listed Sberbank, which has only 3 per cent of its assets exposed to sanctioned companies, is the most foreign-owned and most liquid Russian stock. Sberbank holds two-thirds of Russia’s deposits, trades at five times earnings and 1.3 times book value while earning 23 per cent return on equity.

“It is one of the largest positions in our portfolio and we are adding to it,” said GMO. “You make more money when things go from truly awful to merely bad than when they go from good to great. Russia’s relationship with the world is now approaching truly awful.”

Has the Bitcoin ‘epidemic’ peaked?

The cryptocurrency craze resembles the spread of an infectious disease that has peaked. So says Barclays in its latest Equity Gilt Study, and the parallel is a good one. You have three groups of people: "susceptible" folks who are "vulnerable but not yet infected"; the "infected"; and those "immune" to the virus.


The bubble began with a small number of devotees (the “infected”). The disease spread when “vulnerable” buyers, driven by the fear of missing out, caught the infection. Diseases peak when enough of the population become immune and there are no more secondary infections.

Barclays reckon that’s already happened. Bitcoin suffered peaks and crashes in 2011, early 2013 and late 2013, falling 93, 70 and 86 per cent, respectively. However, awareness was low back then and the potential for new entrants to become “infected” was high. That has changed. Surveys show everyone was aware of bitcoin in late 2017. Many people are immune and the falling ratio of current-to-prior holders suggests a rising “recovered” share of the population.

Consequently, bitcoin, which has lost two-thirds of its value since December’s high, is unlikely to enjoy new highs. The virus has peaked.

Well-aged stocks yield value

Stocks have been volatile lately, but Barclays’ aforementioned Equity Gilt Study will comfort investors who prefer equities to the safety of cash.

UK stocks have outperformed cash in 68 per cent of all two-year periods, notes Barclays. The odds of outperformance rise to 75 per cent if you hold on for five years, and to 91 per cent for those willing to hold on for 10 years.

Mind you, the study also shows stocks aren’t nearly as attractive if you spend, rather than reinvest, your dividends. Adjusted for inflation, a £100 stock investment in 1899 would be worth £34,758 today if you reinvested your dividends. If you didn’t reinvest, however, your original investment would be worth just £203 in real terms – not a great return for a century of risk.

Buffet ’s well-spent youth

Contrary to popular belief, Einstein never said compound interest was the eighth wonder of the world. Still, that doesn't make it any less true, Wall Street Journal columnist Jason Zweig tweeted last week.

Zweig pointed to analysis conducted by Morgan Housel of the Collaborative Fund. Housel noted that $80.7 billion of Warren Buffett's $81 billion net worth was accumulated after his 50th birthday, even though his returns were superior in the first half of his career. Even that understates the power of compounding returns, however.

Buffett, who began investing at the age of 10, had a net worth of $1 million at the age of 30. What if, Housel wondered, 30-year-old Buffett was worth $24,000 (that would still have been more than 90 per cent of his contemporaries in the 1960s), as opposed to the $1 million he accumulated? If he had gone on to earn the same investment returns, he would be worth $1.9 billion today – 97.6 per cent less than his current fortune.

“The punchline is that 97.6 per cent of Buffett’s current success can be directly tied to the base he built in his teens and 20s,” notes Housel. “Without the capital base Buffett built before he could grow a beard, you’d probably never have heard of him.”

Earnings growth may lift US stocks

The ongoing anxiety over trade wars and geopolitical tensions means many investors may have forgotten US companies are about to enjoy a stellar earnings season.

Analysts expect earnings to soar 17 per cent and even that may be an underestimate, JPMorgan argued last week. Of course, many counter that strong earnings, buoyed by a one-off tax cut, are already priced into stocks. Still, recent history will comfort bulls. The S&P 500 has recorded double-digit earnings growth in 12 years since 1991, according to LPL Research. Stocks rose in every one of those years.