As oil prices have plunged and aversion to risky asset classes has remained, few stock markets have performed worse than Russia. Among the ETFs offering exposure to emerging markets stocks, only a handful have performed worse over the last five years than those focusing on Russia.
Russia faces no shortage of economic hurdles. Unlike most emerging markets, demographics are not a tailwind; the country’s population has begun a prolonged decline that is expected to continue for the remainder of this century.
Data Source: UN Projections
Among the other challenges to economic growth is corruption. Russia is generally believed to be among the most corrupt countries in the world; it ranked 136th out of 174 countries in the 201 Corruptions Perception Index. Some select countries are shows in the chart below.
Data Source: Transparency International
There is, however, some good news for Russia — or at least with investors who maintain exposure to the country’s equity markets. Russian stocks are cheap — very cheap. Using the Schiller P/E Ratio (also known as the CAPE Ratio), Russia is the cheapest stock market in the world.
Data Source: Star Capital. As of June 30, 2015.
As a result, Russia’s stock market is expected to deliver some of the highest returns in the world over the next decade.
Data Source: Research Affiliates. As of June 30, 2015.
The wild card in Russia, of course, is energy. Oil and gas account for a huge percentage of Russia’s exports, which makes the economy very dependent on commodity prices. In 2013, energy exports represented nearly 70 percent of the country’s total.
Data Source: EIA
Given this concentration, it should be no surprise that most Russia ETFs are dominated by energy stocks. The energy, financials, and materials sectors combine to represent about 70 percent of the iShares MSCI Russia Capped ETF (ERUS).
Data Source: iShares, as of August 31, 2015.
Russian stocks have fallen out of favor with investors, and they remain unloved for an extended period of time. But for those with a long time horizon and an ability to stomach short-term volatility, there seems to be an attractive opportunity.
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