Thanks to Mebane Faber for getting me looking at Cyclically Adjusted P/E ratios by country again. The one country that caught my eye was Russia:
The beauty of CAPE is that it smooths out earnings so you do not get to caught up in a short term focus. There are many arguments against it, but I believe it gets close to what a long-term investor should be looking at. For Russia, it has been the geopolitical stress and constant news stories that have kept their stocks in the “cheap” zone. In addition, many investors were once bitten by the 98 Russian default and not eager to relive that experience. If you look at the historical volatility of the MICEX index you might feel like caution is a wise choice:
Only 50 stocks and a volatile environment leave everyone fearful of the MICEX index
There are a few things to take a look at before going headfirst towards the Red investment. One item to keep in mind is currency depreciation. If the Russian Ruble is losing value then investing in a Russian ETF denominated in dollars will be hurt by the depreciation of the Ruble.
There has been fairly significant depreciation in the value of the Ruble versus the dollar since 2011 (upward move) but it looks as if the trend might reverse
The second item that is helpful is the credit worthiness of the Russian government. Given that there was a default in 1998, you would think that investors would be extremely cautious in lending money to Russia. But most investment sins are forgiven in about 15 years…
Fear (credit spread) spiked in 2014 but has quickly come back to normalcy
Lastly we could look at what easy ETF options exist to allow us to buy into the Russian story. RSX, ERUS, RBL, RSXJ (small cap) and RUSL (3x Bull!).
For liquidity I will stick to RSX – Market Vectors Russia ETF:
Looks as if RSX has broken above its 200 day moving average
You will never feel 100% comfortable buying into a market that has sold off while everything else has rallied. At the same time, you probably shouldn’t feel comfortable buying into a market that just continues to rally at odds with its own CAPE ratio…
