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Baron Rothschild, an eighteenth century British nobleman, is reputed to have said, "The time to buy is when there is blood in the streets." The idea behind this contrarian investing mantra is that negative geopolitical news typically spooks investors and pushes stock prices down sharply. Usually in recent years, the blood has been figurative, but events in Ukraine in the past few months have caused actual blood to be spilled in the streets. I'm not brave enough to suggest buying Ukrainian stocks, but Russian stocks may be the next best thing. Not only is Russia Ukraine's next door neighbor, but Russia is embroiled in--and some would say causing-much of the unrest in Ukraine.
Let's get the negatives out of the way first. Russia only emerged from being a totalitarian, communist state a relatively short time ago, and the rule of law and private ownership of property may not be all that firmly entrenched there. Clearly Russia's president, Vladimir Putin, is unpredictable. Moreover, Putin's recent expansionist tendencies could put pressure on Russia's economy.
All of these risks are certainly very real, but I suspect they are already priced into most Russian stocks. In addition, Russia does have a number of positives that could boost its stocks. The country is rich in natural resources, including oil and other important minerals. The central bank has been following a very conservative policy that many in the U.S. think the Fed should emulate. While capitalism is still relatively new to Russia, it does seem to be pretty firmly entrenched.
Moreover, Russian stocks have lagged behind those in many other parts of the globe for some time. For example, the Market Vectors Russia ETF, which is the oldest Russian ETF, is up less than 20% over the past five years compared to nearly 120% for the S&P 500. Moreover, the ETF is about 40% below its recent high reached in early 2011.
There are several different ways to invest in Russia. There are a handful of stocks of individual Russian companies that have ADRs that trade fairly actively on U.S. exchanges. Incidentally, I would not recommend investing directly in the Russian stock market unless you really know what you are doing there. There are also several ETFs that hold well diversified baskets of Russian stocks, and some open-end and closed-end mutual funds that do the same. The closed-end funds have the added attraction that they trade at a significant discount to their net asset values.
I named five U.S. exchange traded Russian stock picks in my most recent distressed investing newsletter--which also details four ETFs, three closed-end and three additional open-end mutual funds.