Insight & action

Russian Stocks May Be Too Cheap to Ignore

Will the European Union impose sanctions on Russia?

Nyet.

Today, EU ministers debate an appropriate response to Russian aggression, just as French state-backed shipbuilder DCNS begins sea trials on a newly completed helicopter carrier built for the Russian navy. Building the Vladivostok helped generate nearly 1,000 jobs in France, part of a $1.6 billion deal struck in 2011. In fact, another ship called the Sevastopol, named for the Russian-controlled port in Crimea, is currently under construction. Bottom line: This is a long-term deal.

The irony here speaks for itself. So do the facts. The EU accounts for 75 percent of foreign direct investment into Russia, and Russia accounts for 33 percent of petroleum imports into Europe. Simply put, these guys need each other.

So while EU ministers gather today in Brussels and Secretary Kerry calls for a hard line, we think trade numbers tell the real story. We also argue the markets tell a story of their own. Mr. Putin's assertiveness has come at considerable cost to his country's coffers.

Russia's benchmark MICEX Index contains 50 large-cap stocks meant to reflect the composition of the Russian economy, much like the Dow Jones Industrial Average. It's weighted heavily towards energy and mining. Thirteen components currently have price-to-equity ratios below 10 times (versus 16.1 times for the S&P 500) and also sell at a discount to book value. Of these, seven trade in the U.S. as American Depository Receipts (ADRs).

While few investors we speak to have pounded the table in favor of buying Russia, 20 years of trading has taught us every asset has its price. Given current valuations and the 3.7 percent bounce from Monday's low, Russian blue chips may have found theirs.

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