While the majority of an investment portfolio should be built around low-risk companies and calculated diversification, a very small part of this could be considered as “fun” or “gambling” money. This part is where you can take on some extra risk with the goal of generating some extra-ordinary returns, often through contrarian calls. Usually this involves going to areas of the market that are heavily out of favour.
May be this contrarian call and heavily out of favour market could be Russia. Concerns over a Russian invasion of Ukraine have sent the Russian stock market south. Russian stocks are down by more than 30% in just 2 months.
Relative to the major stock markets, which are trading near all-time high valuations, Russian stocks are incredibly cheap. But investing in individual Russian stocks is very risky, therefore consider broad diversification and therefore the VanEck Russia ETF that includes 29 different stocks that trade only at a ridiculous 6.7 times earnings on average. Extremely low valuations can reduce risk, too. In comparison, the S&P 500 is trading around 22 times earnings.
On top of this, Russian stocks pay very generous dividends. The dividend yield of the VanEck Russia ETF is more than 4 times higher than the yield on the S&P 500. VanEck Russia ETF stocks pay on average around 5.5% on a trailing 12-month basis, while the yield on the S&P 500 is now at an all-time low of 1.29%. With such high yield, Russian stocks can provide a decent return for investors even if the Russian market doesn’t go higher and lowers risk even more.
Further appealing is the fact that Russian stocks could be a great hedge against inflation given that the Russian market has 49% of its value in energy, 20% in financials and another 18% in materials. These are all sectors that do well in an inflationary environment.
It seems that the noise over the situation with Ukraine is overshadowing Russian stocks for now. The market seems to be pricing in an all-out war as being likely. Of course, we do not have a crystal ball and have no idea how that’s going to turn out, but of course, we hope for a peaceful resolution.
If the crisis in Ukraine is resolved peacefully and concerns are removed, Russian stocks are going to have some serious catching up to do because they should generally follow the price of oil. While oil is up more than 27% since early December 2021, Russian stocks are down 20% over that same period. Normally, if the price of oil is up 27%, we should expect Russian stocks to be up at least by the same amount given the leverage they have. There’s nearly a 50% gap that Russian stocks need fill. This disconnect between Russian stocks and the price of oil has created a great opportunity that there could be a huge run for Russian stocks on the cards, if the Ukraine situation improves.
Placing a bet or some “fun” money on Russian stocks might be a good idea. I think it would be fun to have a little money riding on that happening. Just make sure, you aren’t risking much because this one is a high-risk, high-reward special play.
Sven Franssen