Russian Stocks!

Dear Reader,

The Moscow Exchange MOEX Russia Index has doubled in value since during the last five years.

Still, the major Russian stocks look undervalued measured by their Price/Earnings ratio. For 2017, 2018 and up till the 3rd quarter of 2019 the Price/Earnings ratio of the stocks in the Moscow Exchange MOEX Russia Index was 7.8, 8.5 and 6.1 which is tiny compared to the Standard and Poor's Index trailing 12 months Price/Earnings ratio of 22.81 as of 11 October 2019.

Why are Russian stocks so cheap? One of the main reasons is the price of oil. The price of Brent oil reached 136 and Crude oil reached 164 USD in 2008 and in 2007 the Russian economy grew by more than 7%.

Then Gazprom was valued at more than 200 bln. USD. Now Gazprom valuation is close to 90 bln. USD. Sberbank, the largest bank in Russia, is one of the largest banks in Europe in terms of market capitalization. The Russian stock exchange market is dominated by oil and gas, resource companies, banks and retailers.

The Russian stock market is predominantly driven by the price of oil and USD/RUB and EUR/RUB exchange rates. After the annexation of Crimea the Russian economy slipped into a recession and stocks tanked. Due to the sharp depreciation of the Russian Ruble from around 30 Rubles for a dollar to around 64 USD today the Russian economy lost steam and the Russian consumer was hurt. However, since 2015 Russian stocks have staged a remarkable recovery.

These are part of the reasons why Russian stocks are so cheap by international and even emerging markets standards. Personally, I think the price of oil is prone to rise in the near future due to its susceptability to geopolitical conflict. Yes, Russia, Saudi Arabia and the USA are pumping record amounts of oil, but the consumer is not so weak as the price of oil implies. Even if a global recession ensues, the price of oil could rise sharply due to geopolitial pressure. As evidence by the recent drone attack on the largest oil fields in the world in Saudi Arabia, asymmetric war is here to stay. And frankly said, I do not think the geopolitical risk premia is fully incorporated into the price of oil.

So all said, major liquid Russian stocks remain strong value plays for the long term investor. What is more, the dividend yield of Moscow Exchange MOEX Russia Index as of Q3 2019 was 6.7%

Disclaimer: The blogposts and comments on this blog and posts on social networks(Twitter, LinkedIn etc.) are not investment recommendation, are provided solely for informational purposes, and do not constitute an offer or solicitation to buy or sell any securities. The opinions expressed in the blogpost and posts on social networks(Twitter, LinkedIn etc.) are the author's and they in no way express the opinion or official position of the company where I am working currently!

Petar Vladimirov Posledovich is not liable for any investment losses incurred by reading and interpreting blogposts on this blog and posts on social networks.

Conflicts of interest: I may possess some of the securities, currencies or their derivatives mentioned in the blogpost and posts on social networks(Twitter, LinkedIn etc.)!

Respectfully yours,

Petar Posledovich