Russia’s Stock Market Index Is A Swing For The Fences
July 13, 2015

Russia’s Stock Market Index Is A Swing For The Fences

A couple of months ago, my wife and I were having lunch at a restaurant in Ho Chi Minh City, Vietnam.  A young couple looked at the menu posted at the entrance.  Then they sat down at the table next to ours.  They started speaking Russian.  “Leave them alone,” my wife whispered.

She knows that Russians fascinate me.  They’re among the most serious people I have ever met. If a Russian couple, however, does look approachable, I dive in with a big smile and a bag full of questions.  How long are you traveling?  What do you do for a living?  Why are Russian tourists in South East Asia outnumbering almost everyone else?  Are Russians getting wealthier? 

The answer to that last question is yes.  I’m a travel junkie.  I’ve visited more than 50 different countries, often staying for months at a time.  Ten years ago, I never saw Russians in South East Asia.  They didn’t have the money.  But now they’re everywhere.  They scoop real estate like handfuls of jellybeans in much desired locations like Phuket, Thailand and Nha Trang, Vietnam

I’m an index fund investor.  But I’m often asked what I would buy if I were to swing for a fence. Since March of this year, I’ve said the same thing. If you’re patient, and can accept some violent ups and downs, buy a Russian stock market index.

Between January 1st and June 30th, the Market Vectors Russia Index ETF (RSX) gained 21.36 percent.  Other markets are cooler.  The S&P 500 rose just 1.23 percent.  Vanguard’s Total International stock market index (VGTSX) increased 3.62 percent.

Market Vectors Russia vs. S&P 500 and Vanguard’s International Stock Market Index

Returns Since January 2015

Russian Stockmarker returnes since January 2015
Source:  Yahoo! Finance

Russian stocks have been on fire before.  In 2001, 2003, 2005, 2006 and 2009, stocks from behind the old Iron Curtain gained 55.9 percent; 75.9 percent; 73.8 percent; 55.9 percent and 104.9 percent, respectively. 

Russian stocks have declined some since the Greek default, but less than the broad emerging markets index... And they’re still just getting off the floor after a bloody beating.  Since hitting a peak in April 2011, Russian stocks have cratered 56 percent.  Crashing oil prices hurt the economy.  Their currency, the ruble, has fallen 37 percent over the past year, compared to the U.S. dollar.

Market Vectors Russia vs. S&P 500 and Vanguard’s International Stock Market Index

Five-Year Returns

Russian Stockmarker returnes since January 2015
Source:  Yahoo! Finance

But I still see Russians traveling. The walking-around-evidence is good. The west has imposed restrictions on Russians buying global real estate.  But they still appear to be buying.  Pockets in Russia could be very deep indeed.

Market Vector’s Russia index ETF (RSX) contains 47 of Russia’s largest, most liquid stocks. Its dividend yield is 4.42 percent.  Its expense ratio is 0.61 percent.  Based on price to earnings, the index is a bargain.

Yale University economist Robert Shiller developed a system of measuring value that he felt was better than a typical price to earnings (PE) ratio.  A PE ratio measures a stock’s price, relative to a company’s business earnings.  But business earnings can fluctuate dramatically, year to year, so Shiller created a
cyclically adjusted price-to-earnings ratio (CAPE). It doesn’t compare stock prices with the previous year’s earnings.  Instead, it averages ten years of real earnings, comparing that figure to current price levels.  

Between 1881 and 2013, Shiller found that the average U.S. market CAPE level was 16.5.  Historically, when the CAPE level was higher than 24, stocks did poorly in the decade ahead.  When CAPE levels were far below historical averages, stocks rose strongly.

In January, Russia’s stock market CAPE level was less than 8. After a 21.36 percent annual gain this year, it’s still below 10.

Russian stocks have great potential. But invest with intelligence. First, make sure that you have a diversified portfolio of low cost index funds. If you want to swing for a fence, invest a small amount in a Russian stock market index—no more than 5 percent of your portfolio’s total value.

I can’t guarantee that you’ll knock it out of the park. But hang on to the bumpy trajectory. Your odds could be good.

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