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Russian stocks are very cheap at just over 6 times earnings and should be appealing for bargain hunters and contrarians. Weak oil prices have hurt Russia’s economy, but oil may have bottomed out and could rise in the future. The issue with Ukraine remains a wild card, but it appears that all parties have too much to lose and that means a resolution could be likely. The plunge in oil prices and the increasingly stiff sanctions over Russia’s foray into Ukraine have taken a big toll on the economy and the stock market. The negative headlines are likely to continue for awhile when it comes to Ukraine, but as far as the price of oil goes, things seem to be looking up thanks to a recent rebound. I am wary about investing in Russia because the geopolitical risks are significant and there are also currency and other risks. However, when valuations get to very cheap levels, it is hard to resist buying a bargain. Because of the numerous ongoing risks, I can’t allow myself to invest heavily in Russian stocks, but the cheap valuation makes me want to buy small position in the Market Vectors Russia ETF (NYSEARCA: RSX ). Let’s take a closer look: (click to enlarge) As the chart above shows, this ETF was trading for about $26 per share in July 2014, but has since plunged into the low teens. However, it is worth noting that since December, there has been a solid rally as indicated by the light blue uptrend line. Over the last few weeks, oil also appears to have bottomed out and if so, this is a major positive for Russia’s economy. Even so, that leaves the risk of war and sanctions. The sanctions have certainly started to impact the Russian economy, and it could not really come at a worse time because of the plunge in oil prices. If oil prices were still around $80 to $100 per barrel, I believe that Russia could afford to take a more protracted and antagonistic stance when it comes to Ukraine. The fact that oil is about 50% below the 2014 highs, makes me think that Putin will want to be a little more negotiable when it comes to finding solutions with the West that could lift sanctions. Over the last few days, Putin has been meeting with Germany’s Merkel, President Hollande of France, Ukraine’s leader, Petro Poroshenko and other leaders in order to find solutions. If these talks fail, the chance of war might increase which could cause Russian stocks to re-test recent lows. There is a lot at stake for all parties, especially for Russia and many European nations because of significant trade and because they rely on Russian natural gas. In a worst case scenario, Putin could shut off natural gas pipelines to Ukraine and Europe which would be a real blow to those economies. While those are significant risks, it seems like too much is at stake and I don’t see what any of the parties have to gain by escalating matters. On the positive side, if oil has bottomed out and if a cease fire is agreed to and sanctions are eventually lifted, Russian stocks could have significant upside. Russia is here to stay and this nearly perfect storm of weak oil prices and sanctions might be a fantastic buying opportunity. The Market Vectors Russia ETF has a price to earnings ratio of just about 6.5 times earnings. Right now, the S&P 500 Index (NYSEARCA: SPY ) trades for nearly 18 times earnings. The Market Vectors Russia ETF has significant exposure to the oil industry as well as other commodities. Below, you can see the top ten holdings : (data sourced from Yahoo Finance) Top 10 Holdings (57.78% of Total Assets) Chris DeMuth Jr. is a Seeking Alpha contributor, and I believe he is also an extremely savvy investor. He recently wrote about the opportunities in Russia and pointed out metrics which show just how cheap the Russian market is now, he states : “Concerns about Russia have driven down the price of its equity market. Russia’s total market cap is only 17% of its GDP, one of the lowest in the world. This is its historical minimum and far below its maximum of 142% during the past fifteen years. Over the past eight years, its GDP has grown by over 13% per year.” Marc Faber is a well-known investor, and he is also seeing a potential buying opportunity when it comes to Russian equities. He believes Central Banks have inflated asset prices through money printing but that “low valuations” in Russia are worth considering. His views were discussed in a Bloomberg article which stated: “Russian assets may move into some kind of a buying range,” Faber told an investor briefing in London. “They can go lower but they’re moving into a buying range.” Shares in the MSCI Russia index trade at an 80 percent discount to their U.S. counterparts based on their price-to-earnings ratio, compared with an average discount of 50 percent since 2003, Datastream data showed. Russian assets are clearly cheap, and could get cheaper. You should expect volatility to continue. Because of this it makes sense to buy only a small amount and average in over time. It also makes sense to have a long-term time frame. Ten years from now, I doubt the “Ukraine Crisis” will still be top headline news and I also doubt oil will be trading for $50 per barrel. If that is the case, a little investment in Russia could pay off big in the future. Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor. Disclosure: The author is long RSX. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. Scalper1 News
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