At the end of last year, Russia was burning.
The price of oil, which is the largest percentage of the Russian economy, fell from an average of $92.6 a barrel in 2014 to $58 a barrel in 2015. It hit the country hard.
The ruble devalued from 38 per dollar in 2014 to 55.1 per dollar on average in 2015. GDP went to a negative 2.7%. CPI (inflation) went from 7.7% in 2013 to 15.5% in 2014 but has since fallen again to 7.5% this year.
All of a sudden, the price of sausages doubled. The price of chicken climbed 17%, tobacco went up 28%, and foreign travel was now out of reach. Imported luxury items like Nivea cosmetics or certain brand-named clothes tripled in price.
The worst is over. Here is the five-year Brent oil price chart:
As you can see, the price of oil on the world stage has stopped falling and is now climbing back up. The World Bank estimates that it will average $63 a barrel next year.
The Russian ETF (NYSE: RSX) has rebounded with the price of oil and is riding the uptrend.
Value
The upshot is that Russian stocks are the cheapest of all major economies at the same time the economy is getting better.
In fact, Russian stocks are dirt-cheap. There are a number of stocks that could easily double or triple over the next two years.
Even though the Russian index has been the best-performing market over the last two years, it remains undervalued. The RSX no longer has a P/E of 4.5 — now it is 8, but still well under the P/E of 19 on the S&P 500. And growth means stocks can go up without P/E multiple expansion.
There is a certain large oil stock that carries a P/E multiple of 2.5 with a dividend yield of 4.5% and trades at a little over $1 per barrel of proven reserves! A triple in the share price wouldn’t be out of the question.
For comparison, Exxon trades at 19 times proven reserves.
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Sanctions
One of the biggest variables regarding Russian investments are the sanctions put on by the EU. The EU meets in late June, and the thinking is that it will roll over the sanctions until January based on the mixed results of the Ukraine ceasefire.
It should be noted that they are not talking about adding more sanctions. Greece has said it will not embrace more sanctions, and Greece has veto power.
This presents a nice entry point. If the Russian market sells off due to a perceived sanctions rollover, we can get in at a better price and ride the stock surge when the sanctions expire either over the next month or in January of 2016.
Meanwhile, the Russian economy will benefit from higher oil prices, lower inflation rates, and a stable ruble. Furthermore, the Russian Central Bank will have more room for easing.
It should be noted that, unlike every Western economy, Russia has a very strong balance sheet. Debt-to-GDP is only 17.1% compared to 110% for the U.S. and 250% for Japan.
And despite spending billions to defend their currency last year, Russia still has $385 billion in foreign currency reserves.
All of this means the next month will provide a spectacular opportunity to invest in some of the lowest-priced blue chip stocks in the world. Look for my special report coming out next week.
All of the bad news is priced in, and positive stock market catalysts are coming down the pipe.
They include rate cuts, the end of sanctions, and a higher oil price — any one of which would launch Russian equities.
Fortune favors the bold,
Christian DeHaemer
Check us out on YouTube!Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.
