They say buy when “blood’s on the street”, perhaps its time to get into Russian equities…

3 mins. to read

Unlike most investors, true “contrarians” are essentially value seekers. They wait patiently for the best profit opportunities based on dislocations between the market’s “price” and the underlying intrinsic value. What the “crowd” is doing is of no significance to them. In the words of Mr Buffett – “price is what you pay, value is what you get” (or not as the case may be).

Contrarians typically buy shares that others hate while they sell what others love. To a contrarian, when sentiment is euphoric, this is a sign that prices have very likely already risen too high, and so making it the potentially a time to sell. Conversely, when sentiment is low, stocks have probably been heavily battered down and this may in fact result in them potentially holding juicy upside surprises.

While the average retail investor remembers 2009 as one of the worst investment years in recent memory, the value-seeking contrarian investors look back on the period as an epic opportunity to buy not only stocks but also houses, boats, businesses and any other kind of real assets at very attractive prices. The crisis pushed many businesses to the brink of bankruptcy and forced them to sell assets at any price to realise much-needed liquidity. Contrarians always wait for these moments to make their investments. They behave differently from other investors, they disagree with the crowd and they take a different course of action – buying when others are selling at any price and, for the really smart ones, selling when others are buying. Trick of course is finding the inflection points.

In recent years, while it seems that buying US equities is the only game in town thanks to the boost in sentiment generated by the Fed, emerging markets have been penalised, in particular Russia. The conflict between Russia and Ukraine triggered by President Putin in March has been a major drag on the Russian stock market, which is currently down 10% year-to-date and was down by more than 25% at the time the conflict started in March. At the end of June, the market had almost recovered these losses, a sign of fundamental undervaluation, but it took another hit in July after the Malaysian Airlines Flight 17 was taken down in Ukraine.

While investing in Russia is controversial at this point because of economic, political and social issues, with most investment managers discouraging investment, the truth is that it Russia has always been a controversial investment play. Investment is always a balance between fear and greed, and most people don’t feel comfortable with fear, lest of all buying it. Plunging in when sentiment is depressed and when there are many apparent risks is a tough call – one that most people aren’t prepared to take – but it is exactly at this time that profits are most likely to be made and not five years after the start of a bull market…

The Russian benchmark index is currently trading below 5x projected earnings, which contrasts with the 12x average for emerging markets in general. In certain cases (Gazprom being one example), stocks are trading at 2.5x earnings or even less, which makes the Russian market potentially an epic value proposition. Sure there are many risk, but these are largely known, and if they are known then they are “in the price” usually.

Dave Iben from Kopernik Global Investors is just one of those “contrarian” investors now taking advantage of the opportunity in Russia. His $890 million (£535 million) Kopernik Global All-Cap mutual fund is 15% invested in Russian equities like Gazprom, RusHydro, Federal Grid Company of Unified Energy and Sberbank of Russia, while the typical emerging market mutual fund is just 1% invested in the country. That is a punchy bet, Iben believes the market is trading at a 50% discount to real value and that prices will eventually converge to intrinsic value as the crisis plays out.

It could be time to take the plunge into Russian equities and buy the fear. Stocks like Exillon, Ruspetro etc have been beaten down dramatically and may be worth further research or the Russian ETF – RSX – is a way to gain wholesale exposure to the market cheaply and effectively.

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