Stocktake: Russian equities are dirt cheap


Buy Russian equities?

Few want to, given Vladimir Putin’s sabre-rattling, the Micex index recently collapsing 12 per cent in a single day – its biggest one-day drop in five years.

Even before the Ukraine-induced sell-off, fears regarding corruption and lack of financial transparency meant Russia was easily the cheapest major market in the world, falling some 30 per cent since 2011 even as global indices soared.

The Micex trades on just 4.7 times estimated earnings, compared to 13, nine and eight respectively for the other members of the BRIC – India, Brazil and China. Its 10-year cyclically adjusted price-earnings ratio (Cape) was just seven before the recent selling.

Yes, the index is undiversified – energy accounts for 57 per cent, financials another 16 per cent – but its Cape ratio looks even cheaper when one adjusts for its sectoral make-up, according to Barclays data, and betting on countries with low Cape ratios has been a winning long-term strategy.

It may get cheaper, depending on political developments, but contrarians must be tempted by an index that looks oversold, undervalued and almost universally shunned.

As Marketwatch’s Matthew Lynn put it, investors are “pricing in everything short of Stalin crawling out of his grave and re-occupying his office in the Kremlin”.

Should investors be spooked by prospects of war?

Russian markets may have tanked, but global indices have been relatively serene. If the Ukrainian situation worsens, will investors get the jitters?

History indicates volatility will be short-lived. Last year, S&P Capital IQ strategist Sam Stovall examined 14 geopolitical shocks since 1941, taking in examples such as the Cuban missile crisis, Opec’s 1973 oil embargo, Iraq’s 1990 invasion of Kuwait and the 9/11 attacks.

Sell-offs are usually brief – even after 9/11, it took just 19 days for the S&P 500 to recover its initially steep losses.

The Russian-Georgian war of 2008 had almost no impact on the S&P 500, nor did the Arab Spring of 2011. Fears of US intervention in Syria last August saw markets fall 3 per cent before quickly hitting new highs.

Each case is different, but if markets do sell off in the event of escalating tensions, history indicates investors should buy into fear.

Alarm at insider selling
US company directors are more bearish than at any time since before the 2008 market meltdown, according to Marketwatch’s Mark Hulbert.

Hulbert cites data from insider selling expert Prof Nejat Seyhun, who finds insiders have strong forecasting ability if one ignores the actions of the largest shareholders and focus on company officers and directors. His adjusted insider sell-to-buy ratio in summer 2007 was at levels unseen since he began tracking the data in 1990.

Besides 2007, the only other time selling matched today’s levels was in early 2011, months prior to a 19 per cent market fall.

Buying at the top
What if you only invested at market peaks? Investment manager Ben Carlson ( did the stats on a fictional investor who invested $6,000 (€4,326) in late 1972, just before markets halved in 1973-74.

He didn’t sell but, unnerved, waited until October 1987 to invest again, depositing $46,000 (€33,165) of savings in an S&P 500 fund just before markets tanked 34 per cent.

Again, he didn’t sell, but waited until late 1999 before investing another $68,000 (€49,028), right before the dotcom bust and a 49 per cent fall. Another $64,000 was invested in October 2007, right before a 52 per cent collapse.

So how did the world’s worst market timer do? His $184,000 (€132,706) investment grew to $1.1m (€0.79m). Investing at peaks isn’t ideal, but getting spooked and selling is worse. “If you are going to make investment mistakes”, says Carlson, “make sure you are biased towards optimism and not pessimism.”

Investing – is it all in the genes?
Stock preferences are “partially ingrained in an investor already from birth”, a study has found. The paper, Value versus Growth Investing: Why Do Different Investors Have Different Styles?, examined the portfolios of 35,000 twins in Sweden. The average stock held in the portfolios traded at a price/ earnings ratio of 23, with just 10 per cent opting for cheap value stocks. Genetic variations partly explain whether people will opt for value or growth stocks, accounting for up to a quarter of the differences among investors. Investors’ environment also shapes them. Those from poorer backgrounds, as well as people who entered adulthood at a time of recession, were more likely to prefer value stocks later in life.

In other words, Ireland’s economic crash is likely to shape young people’s investing behaviour decades from now – for the better.

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