The MICEX stock exchange in Moscow
The Russian market, at about 7.1 times trailing earnings, is one of the cheapest by earnings multiple of any other on the planet. So why is it that the market has only gone one direction over the past year?
As a deep value investor, Russia has come across my screen a few times over the last year and I have been tempted to take a position in the market. The fact that has kept me out, and that which the government’s venture capital firm would like to change, is that Russia is largely a call on oil prices. In fact, more than half of the government’s revenue comes from energy firms. If I wanted to invest in energy, there are a number of other domestic or international firms that would not have to work around the level of bureaucracy involved in Russian business.
This may change soon.
The Boston-based arm of the Russian Venture Company reported recently a $1 billion in funding for projects from retail to healthcare and technology to jumpstart small business growth and diversify the economy. That number dwarfs the $688 million in funding over the past five years.
While the market is still mostly closed to foreign investors, relative to other emerging nations, there are several funds that give exposure to the local market. A shift in the economy will not happen overnight, but it is a step in the right direction and may just improve sentiment in the market.
The Market Vectors Russia ETF (RSX, quote) is the largest fund dedicated exclusively to Russian companies. The fund provides little exposure to the smaller, growth targets of venture capitalists with 88% of holdings in firms with a market cap exceeding $5.0 billion and the rest in mid-size firms. Replicating a general exposure to the Russian market, the fund is overweight energy holdings (41.6% of total), followed by materials (21.3%), financials (11.3%) and telecommunication services (11.0%). The fund does pay an enticing 3.3% dividend yield and trades for just 0.86 times book value.
The Market Vectors Russia Small Cap (RSXJ, quote) offers a stronger play on the kind of firms that may benefit from the government’s attempt to diversify its economy. The fund has 22% of its assets in companies with less than $1 billion in market capitalization, followed by 68.2% mid-cap and less than ten percent in large cap companies. It holds a majority of assets exposed to the energy sector with 24.1% of total holdings, but is a little more diversified across other sectors like: materials (22.6%), industrials (20.7%), consumer discretionary (8.7%) and financials (7.5%). The fund pays a 2.68% dividend yield and trades for 0.83 times book value. The smaller fund has underperformed over the last year with a loss of 18% versus a loss of 10% in the general country fund.