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Just yesterday it seemed like Russia was ready to take military action against Ukraine in the disputed region of Crimea.
Now, Russian prime minister Vladimir Putin has said he sees ‘no need’ for military force in Ukraine.
Investors had already been anxious about the weakness of the ruble and the economy. The regional tensions have caused investors to flee from of the Russian stock market.
Russian stocks are down roughly 20% year-to-date.
Jacob Nell at Morgan Stanley writes that this could be a buying opportunity.
“[The] sell-off has taken the market to technically extreme oversold levels,” writes Nell. “Valuation multiples have only been cheaper at the depths of the 2008 crisis (when earnings fell by 60%). And oil markets are stable in contrast to sell-offs in Russia historically. Despite the obvious hit to growth expectations implied by the crisis, any sign that tensions are beginning to de-escalate would constitute a buying opportunity.”
It’s important, however, to note that cheap valuations don’t mean guaranteed immediate returns.
According to Meb Faber of Meb Faber Research, low valuations could not prevent Russian stocks from falling in in 2013. Faber points to the cyclically-adjusted price-earnings (CAPE) ratio, a valuation measure popularised by Nobel prize-winning economist Robert Shiller. CAPE is calculated by taking the price of an asset and dividing it by the average of 10 years worth of earnings.
Generally speaking, overweighting stocks with low CAPE ratios appears to be a winning strategy in the long-term. And currently, Russia has the second lowest CAPE ratio in the world, right above Greece.
“While we may see a mild in-year recession, a weaker RUB and hence lower imports, in addition to a supportive oil price in case of increased geopolitical risks, should act as stabilizing factors,” said Nell.
Again, there are no guarantees here. But for the patient investor with a lead-lined stomach, Russian stocks appear to be an interesting long-term investment opportunity.