Is Russia's Stock Market Undervalued?

 

Dear Reader,

In terms of valuation the Russian stock market is far behind US and China.

Nation	Calculated Using	12/31/2020	6/30/2020	12/31/2019	6/30/2019	12/31/2018	6/30/2018
Canada	S&P/TSX Composite	22.82	21.67	22.33	23.69	21.37	24.28
US	S&P 500	33.44	29.35	30.91	31.00	28.02	32.20
UK	FTSE 100	13.66	13.22	15.81	15.77	14.29	16.36
Italy	FTSE MIB	22.12	18.71	22.76	21.20	17.69	21.45
Spain	IBEX 35	15.11	12.36	15.49	14.54	13.04	13.90
Russia	MOEX	9.73	8.21	10.05	9.65	7.86	7.87
India	NIFTY 50	29.91	23.29	27.49	27.91	25.86	25.81
Japan*	All public companies, (uncons.)*	31.90	28.50	33.50	32.76	32.99	39.71
Japan*	All public companies, (consol.)*	24.26	21.58	25.28	24.67	24.72	29.62
China	SSE Composite	18.09	15.82	15.80	15.71	13.38	15.49
Hong Kong	Hang Seng	14.10	12.70	14.84	15.55	14.61	16.92
Australia	ASX All Ordinaries	17.99	15.50	17.87	17.94	15.50	17.45

So I would say Russia's stock market is 50 % undervalued. Two factors contribute to the undervaluation of Russian equities listed on the Moscow exchange. One is the price of oil which crashed since 2014. Lately the price of oil has recovered somewhat, but not by much so as to cause a boom in Russian equities similar to the boom in US listed technology shares. The second factor is the sanctions on Russia imposed mainly by the US. Mainly the slump in the price of oil has caused the Russian Ruble to halve in value compared to the USD since 2009. 

Naturally, the GDP of Russia fell from 2.292 trillion USD in 2013 to 1.7 trillion USD in 2019, the latest official figures. 

Gazprom and Lukoil, the two largest petroleum and gas producing companies both in Russia and globally have Price/Earnings ratios of 1.79 and 2.92 which are very low in international comparison.

Currently, many leading Wall Street research analysts are forecasting the price of oil will rise. I think this will significantly raise the market capitalization of the major companies listed in Russia. The Russian Ruble will increase in value. What is more, Wall Street research analysts forecast rises of the main commodities prices. Russia is the world's largest exporter of grains, and a regular top three oil producer along with Saudi Arabia and the USA. Russia's regularly exports oil at more than 100 billion USD value every year. The expected price increases of oil and other major commodities will improve the cash flow and net profit generating capabilities of Russian companies and naturally increase their intrinsic value. What is more, the future prospective strengthening of the Russian Ruble will improve Russia's domestic market strength which would also raise the market capitalization of listed Russian stocks.

What is more, the global economy is forecasted to improve significantly starting from the second quarter of 2021. This would raise the prices of commodities and most probably will decrease the sanctions pressure on Russia which will further strengthen Russia's economy. 

Furthermore, Russia has Yandex, which is an Eastern European search engine popular in the Eastern part of Europe. Yandex is the third largest search engine by market capitalization after Alphabet, Google's owner, and the Chinese Baidu. Russia has long been known for its technological prowess driven by the excellent quantitative skills of its engineers, mathematicians and programmers. Telegram is another technology success story coming out of Russia. So Russia has both companies with operational leverage like Yandex and Telegram and cyclical natural resources producers like Gazprom, Lukoil and others that will benefit from the coming mild economic boom.

All in all, Russia's stock market, barring political instability, is set to outperform almost all major stock markets over the next two years. Russia's stock market, in my opinion, is 50 % undervalued at current levels.

Disclaimer: The blogposts and comments on this blog and posts on social networks(Twitter, LinkedIn, Facebook 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 on the blog are Petar Posledovich's. Petar Posledovich does not guarantee the accuracy of the information presented on this blog and social networks. The information presented is "as is".

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