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Monday, 22 January 2018

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Is Russia Cheap enough?

Welcome! Forums The Big Picture Is Russia Cheap enough?

This topic contains 12 replies, has 3 voices, and was last updated by  Dee Satterfield 3 years, 7 months ago.

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    JAY V.

    Steve McDonald at Oxford Club sent out his weekly video today and in it he comments about the whistle blower Magnitsky , who in 2008-2009 pointed to the corruption in Russia and $billions of Rubles stolen directly from the treasury through the tax collection office. McDonald mentioned that many millions have found their way to USA and into real estate in New York city. Magnitsky was arrested and died mysteriously in Nov 2009 under police custody.


    At what point is corruption so prevalent and pervasive that investment is not a good idea? When is it cheap enough? How do we discount for corruption? no rule of law?



    Jay – Unfortunately I don’t think you know until it is too late.

    For example, based on my personal experience of 13 years living and working in Indonesia, including several years in Government Relations on behalf of my employer, with an Indonesian wife who is well connected to the Cendana Family (family of the former president Soeharto), we found it impossible to find reasonable business opportunities in Indonesia. We have some very long term real estate holdings in Indonesia, but have to remain vigilant as one piece of land was being rented out as a parking lot without our knowledge. First they (the locals) rent it out, then they put small structures on it (e.g. a temporary market), then something more substantial, and then before you know it they claim ownership and it takes a great deal of time and effort to “reclaim” what is rightfully yours. In general only Indonesians can own land (Bali is a bit of an exception) so the land is owned by my wife, and as such, many of these investment opportunities are not available to foreigners. I find South East Asian investment recommendations from the Bonner & Partners advisors somewhat naïve as I don’t see them having a lot of “boots on the ground” experience in this part of the world.

    In regards to Russia, my background is mining, engineering and construction, and one of my associates was almost killed in Moscow as a result of someone slipping something into his drink at a high end hotel restaurant that left him unconscious for 48 hours. Fortunately the hotel staff got him to the hospital. If it had happened outside the hotel, and he had passed out on the street on the way home, people would have stepped over him as “just another drunk” and he probably would have died. The doctors told my friend that probably the reason he survived was that at 6’4″ and over 250 lbs, the dosage had been under-estimated. The interesting part of this story is that it was well known that my associate was very well connected to one of the most powerful oligarchs in the country, and yet still someone tried to murder him (maybe a message to the oligarch) and my friend’s business (a publicly listed exploration company at one time valued at over $100 million) went bankrupt literally overnight.

    I know these anecdotes are not the same as investing in country specific ETFs and the like, but trying to pull out individual companies in developing economies is a bit of a crap shoot, and again, I tend to ignore the advice of the Bonner advisors in this regard.

    So what am I doing? I’m in Nicaragua developing hydroelectric projects. Not without risk, but I believe I have good Nicaraguan partners, but don’t we all until they turn on us. After working in SE Asia and several other Latin American countries (Mexico, Peru, Chile & Colombia) I think Nicaragua as an investment destination has no higher risk than many developed economies. We have put together a special purpose vehicle in Nicaragua, are funding the early stage development through a private entity in Panama, and are putting together a public vehicle in Canada to provide investors with various options (both debt and equity) to participate. Time will tell if we are right, but it gives us the opportunity to contribute to the development of Nicaragua while offering a relatively low risk return to our investors. However, as with everything else, it is buyer beware, and free advice is usually worth what you pay for it.

    Best Regards



    CLIVE R.

    Interesting question … to which I have no good answer.
    Rob has made such a good case for owning Russian stocks, especially Gazprom, the seemingly no brainer investment for supplying energy to Europe. Syria seems to be a bottleneck for now, and possibly for a long time as the power changes hands in the Middle East.
    Corruption is the way of the world. It is very evident in Russia and China, Argentina and Africa. It is less so in USA and Switzerland, but certainly not missing, just different. It makes investing in anything on the stock market like gambling in a magic black box. How can we take the manipulations of the Feds seriously, let alone a hedge fund pumping and dumping a smaller company? And how about that SEC?
    My feeling about Russian stocks is that the whole world is deflating and as the Reserve currency moves back to the USA for “safety”, the rest of the world, the emerging markets, will take a hit, as they are now. The US market is primed for a hit too. When that happens, the emerging markets will get hit again.
    That’s when we can deploy some of that cash. Don’t lose it before then. “Investing” in corruption is for chumps, fools and suckers. Choada was another place to lose money. China is also a problem when it comes to the all important ingredient for money (or any) relationships: TRUST.
    Putin seems okay. The pussy riot girls have another opinion. Magnitzky is right … and dead. He risked pointing out corruption.


    JAY V.

    Andrew and Clive, thanks for your thoughts and comments.

    I do like pipeline/energy business opportunities and have found them in our own backyard (Kinder, Vanguard, etc). Investing in South American companies/opportunities is way more interesting to me than Russia as I understand these cultures and legal systems better. Brazil for instance has interesting opportunities (banks like Bradesco and Itau, plus other items on sale) and Mexico shows continuing potential . Yes, there is corruption in these places also, but it seems an order of magnitude less than Russia.

    http://sochi.fbk.info/en/award/ :from a Washington Post article.


    JAY V.

    Reasons to consider a Russian ETF is the low valuation ( BFOffice stated reason) they trade at, ETF diversified portfolio risk, and playing the Beta, rather than the Alpha.


    JAY V.

    Today’s inbox included comments from John Mauldin and an interview that is pretty on point about Russia, so I thought I would share it with you.

    World Money Analyst Update on Russia
    John Mauldin | Feb 20, 2014
    World Money Analyst Managing Editor Kevin Brekke interviewed WMA contributor Ankur Shah on emerging markets, but they didn’t touch on one very important emerging market: Russia. So this week I have brought Kevin back to sound out the views of Alexei Medved, WMA’s Russia and CIS contributing editor.

    And right off the top, Alexei tells us two significant and surprising things about the Russian market:

    One should look at investing in Russia from at least two time perspectives: long term, meaning 10-plus years, and a medium time horizon of 1-3 years.

    Long term, Russia is still the best-performing major stock market in the world for the period 2000–2013, when measured in US dollars against the major market indexes. It is well ahead of not only all developed markets, but also the markets in China, Brazil, and several other emerging markets that were and are much more a centre of attention by Western media and investors. This long-term outperformance was achieved despite the fact that 2013 was not a good year for Russian equities, with the RTS Index down 5% in 2013.

    Medium term, the Russian market remains the most undervalued. The average P/E is about 4.5, significantly below other emerging markets and way below the multiple on shares in the developed markets.

    Needless to say, there are challenges with investing in Russia, too; and Alexei and Kevin cover them thoroughly. If you have wondered about Russia – or for that matter the markets of emerging and developed countries anywhere else in the world – you really should tune in to World Money Analyst.

    John Mauldin, Editor
    Outside the Box

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    World Money Analyst Update on Russia

    World Money Analyst: I am very pleased to speak with Alexei Medved. Alexei is the Russia and CIS contributing editor at World Money Analyst, and I caught him at his office in London. Thank you for joining us today.

    Alexei Medved: My pleasure, thank you for inviting me.

    WMA: As you and I have discussed before, Russia remains a little-understood market for many Western investors. Can you talk a little about the investment backdrop for Russia?

    Alexei: One should look at investing in Russia from at least two time perspectives: long term, meaning 10-plus years, and a medium time horizon of 1-3 years.

    Long term, Russia is still the best-performing major stock market in the world for the period 2000–2013, when measured in US dollars against the major market indexes. It is well ahead of not only all developed markets, but also the markets in China, Brazil, and several other emerging markets that were and are much more a centre of attention by Western media and investors. This long-term outperformance was achieved despite the fact that 2013 was not a good year for Russian equities, with the RTS Index down 5% in 2013.

    Medium term, the Russian market remains the most undervalued. The average P/E is about 4.5, significantly below other emerging markets and way below the multiple on shares in the developed markets.

    WMA: How has the Russian market held up so far this year, with emerging markets under pressure?

    Alexei: Since the start of this year, the Russian market has underperformed other markets, down 8% in US dollar terms. This, to a large extent, could be explained by a noticeable decline of the ruble against the US dollar (-5.5%).

    As you know, so far this year many emerging markets and emerging market currencies have been punished significantly, as Western institutional investors became worried about macroeconomic pressures in some of the emerging economies, like Turkey and Argentina. These countries have problems that are real and serious: too much external debt, a trade deficit, a budget deficit, declining foreign currency reserves, etc. So, it is understandable why foreign investors withdrew a lot of money from these markets recently.

    What is hard to understand is why they also withdrew significant amounts of money from the Russian market. In my view, it is primarily because most investors continue to view emerging markets as a single class of investments. So, when they withdraw money they do it across the board, in all emerging markets. This is generally not the best approach. In contrast, investors do not approach developed markets as a single class, but differentiate between the countries.

    WMA: Using your examples of Turkey and Argentina, how does Russia compare in terms of the macro picture?

    Alexei: The macroeconomic position of Russia is vastly different from that of Argentina or Turkey. For starters, Russia has a positive trade balance and a balanced budget, unlike these and many other emerging and developed countries. Russia also has a very low debt load, with the ratio of external government debt-to-GDP around 10%, much lower then the roughly 95% in the US and even higher in some European countries. Further, the unemployment rate in Russia is around 5.5%, meaning the country is essentially running at full employment.

    The unrefined “sell everything that’s emerging” approach apparently in play by Western institutional investors has led to the Russian market being unjustifiably punished. The good news is that the punishment has created even better investment opportunities for investors who can avoid “heard mentality.” There are solid, profitable Russian companies that are trading today at very low valuations.

    WMA: One of your areas of expertise is the use of short-dated, US-dollar-denominated Eurobonds to capture higher yield and manage risk. Can you explain this strategy a little for our readers?

    Alexei: Of course. I think Russia and the CIS also present a good opportunity for fixed income investors. Given my serious worries about a possibility of rising inflation and yields in developed markets, we recommend investing only in relatively short-term bonds (under 4 years). Our [Alexei’s independent business] weighted portfolio maturity is now under 2 years. One can either invest in Russian sovereign debt or the safest corporate bonds and receive somewhat higher yields than in comparable developed-economy bonds. Investing in bonds that do not have an investment grade rating from one of the major rating agencies is another option.

    Based on our local knowledge, we particularly like some high-yield bonds where we have a decent understanding of the company and believe that the bonds will be repaid, despite fairly low ratings from the credit agencies. This way, we invest in bonds that offer 10%-12% yields.

    WMA: Switching to issues of politics and governance, many observers are concerned about issues of corruption in Russia, making it difficult for an investor to navigate the market. Has the current government embraced reforms on this?

    Alexei: Obviously, one has to be very careful when considering investing in Russian equities or bonds. For investors that lack knowledge about the country, I do not recommend they attempt a do-it-yourself approach to selecting Russian shares. A better approach is to either invest through an index fund or to seek share selection advice from people who specialize in the Russian market on a day-to-day basis. This is in spite of the fact that over the last decade, Russia to some extent became much more investable.

    Back to your question, corporate governance has generally improved, although perhaps not as much as some investors would like. The government is taking steps in this direction, yet a lot remains to be done. As Russia recently became a full member of the World Trade Organization (WTO), and its market is opening up to external competition, Russian companies will have to become more efficient to compete, and thus more profitable for investors.

    Many investors have yet to wake up to the reality that Russia is a serious global player that’s here to stay. This opens up even more opportunities for investors.

    WMA: The January issue of World Money Analyst highlighted the importance of taking a longer view on markets and investments, something that you and I agree on. You’ve made some great recommendations at WMA, and recently advised to take profits on two stocks that were held for a year or longer. Can you briefly go over these trades?

    Alexei: Yes, as I said earlier, one has to look at these opportunities on a medium- to long-term investment timeline and not attempt to trade these markets, as one’s investments can get unjustifiably punished, as is happening now. We have been active in the Russian market for over 20 years and certainly maintain such an approach when we look at investments to recommend to our clients. Once the investment is made, we monitor it on a constant basis, as one cannot just “salt it away.” Once the shares reach our target price, we sell them and move on to the next opportunity.

    In the January 2014 issue of WMA, I recommended taking profits on two positions. The first was the shares of Russian airline Aeroflot, recommended in the January 2013 issue. By January 2014, its shares had moved up nicely on the back of stellar company operating results. We advised to sell the shares and realized an 84% gain, including the dividend, in 12 months.

    The second was the shares of AFK Sistema, a large-cap (US$18 billion) company that restructured itself from a conglomerate into essentially a private equity fund. I recommended its GDRs in the July 2012 issue. By January 2014 the shares had moved up significantly, and I advised to sell in that month’s issue of WMA. We pocketed a total return of 63% in 18 months.

    These returns are particularly remarkable against a negative 5.6% return of the

    Russian RTS Index in 2013. While we still like both of these shares, their significant appreciation had reached our price targets, so it was time to cash in some chips. And seeing that these shares are now trading lower, we got out at the right time and preserved the investors’ profits.

    WMA: We can’t talk about Russia and not mention the ruble. Investing in certain currencies – like the Canadian dollar and Norwegian krone – has been in vogue for several years on the premise that these are “resource currencies” supported by the natural resource wealth of the issuing country. With Russia’s vast mineral and commodity wealth, should we consider the ruble a commodity currency?

    Alexei: Given that Russia is a large producer of oil, gas, and some other commodities, to some extent the ruble should be seen as a commodity currency, perhaps even a petrocurrency. So, if one believes that the oil price is likely to decline significantly and stay low for years to come, one should not buy Russia. However, if one believes that the oil price trend is flat to up in the medium and long term, Russia will do well macroeconomically.

    WMA: Next to the emerging markets, another big issue is developments in Ukraine. You have covered Ukraine for World Money Analyst subscribers. The country seems to be caught in a conflict about alliances: to enter into a closer economic alignment with Moscow, or shift to stronger ties with the EU. What are your thoughts on this and the investment implications for Ukraine?

    Alexei: It is very sad that the situation in Ukraine has deteriorated as far as it has. Some lives have been lost. Ukraine is torn between the current government that is leaning towards the Customs Union with Russia, and a large proportion of the population, perhaps a majority, which would support a closer cooperation with the EU.

    Ukrainians are also fed up with perceived government corruption and diminishing civil liberties in the country. In December, Russia provided a US$15 billion rescue package to Ukraine and immediately disbursed US$3 billion. It remains to be seen which way the current situation will be resolved.

    However, there are some corporate bonds in Ukraine that should be relatively immune to this political turmoil. One of the companies we like in Ukraine is MHP, the largest chicken meat producer in Europe. The company is fairly insulated against possible further depreciation of the local currency, as it sells 37% of its products abroad. After the recent sell-off in Ukrainian bonds, one can buy the Eurobond of MHP priced in US$ with a maturity in April 2015 and a yield-to-maturity of 10.6%. Such a high yield on short-dated paper is very hard to find elsewhere.

    WMA: Any final thoughts for investors about the opportunities in Russia?

    Alexei: The latest sell-off of Russian shares represents an opportunity to buy quality companies at discount prices. Today, we can see compelling value in world-class companies with assets not just in Russia but globally (including the USA), good corporate governance, and nice dividends. In short, I agree with Warren Buffet: “Buy when others are fearful.”

    WMA: Alexei, thank you for sharing your valuable insights into the dynamic Russian market.

    Alexei: You are welcome. My pleasure.

    Learn more about World Money Analyst here.


    JAY V.

    I hear the drum beating.
    After this latest dip in RSX, with what looks like exasperation selling, it may be cheap enough…. I am going to start a position.


    JAY V.

    Interesting privately owned company CTCM, a Russian television business. P/E is about 9, stock is about 2/3 down from its highs… and yields 7-8%. Good Ebitda record. The Beta is clearly affecting its valuation by the market. I believe there is no government ownership, something I prefer. Thoughts? Comments?


    JAY V.

    added clarification re CTCM ownership-


    CTCM:There is a 25% ownership that is linked by owner relationships to possible government influence. A majority is owned by foreign investors. See last paragraphs of this article…


    JAY V.

    JAY V.

    JAY V.

    From Tim Seymour’s website…a shorter term view , with long term scar tissue.

    Gazprom Said to Stop Courting U.S. and E.U. Investors After Crimea Sanctions


    JAY V.
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