A New Cold War or A Hot Bargain for Investors?

By Lee Bellinger / March 28, 2014

Russian Stock Market Gets

Clobbered over

Ukraine Splintering

“We have entered a new Cold War,” declared foreign affairs columnist, Frida Ghitis, sounding the alarm for escalating conflict between the U.S. and Russia.

Such talk seems a bit overblown. Russian leader Vladimir Putin doesn’t seem to have any great territorial aspirations beyond Crimea and isn’t mimicking the Soviet-era regime’s bellicose boasts of, “We will bury you.”

Yet global investors are fleeing Russian assets as if the Communists were coming back to power! If the U.S. and Europe started freezing Russian assets and isolating the country economically with heavy-handed sanctions, then things certainly could get a lot worse for Russian corporations.

That’s not likely to happen. Europe and the West are too dependent on Russia’s commodity exports. Russia’s Gazprom supplies a quarter of Europe’s natural gas demand. Russia is the world’s top supplier of palladium and the fifth biggest source of uranium. Russian uranium stockpiles account for almost 40% of the fuel used by American nuclear plants.

Russia Remains

an Energy Juggernaut

If you believe that mutual self-interest over economically critical energy inputs will trump political posturing, then Russian resource stocks may be the greatest value play around. The Market Vectors Russia ETF (RSX) is 44% allocated to the energy sector, which includes names like Gazprom and Lukoil.

If the crisis in Crimea had caused Russian equities to break down from a major, persistent uptrend, then we’d probably want to sit on the sidelines and wait for the major trend change to play out. In this case, Russian stocks had already been trading at depressed valuations compared to other emerging markets before the precipitating event caused prices to break down. Perhaps with some justification – the Russian economy is only growing at a 2% pace despite the ramp up in infrastructure spending for the Olympics.

So while more downside could lie ahead in what is a notoriously volatile equity market, deeper declines would serve to stretch the rubber band further for a more powerful eventual snap back.

As hard assets investor Jim Rogers opined before the Ukraine crisis exploded, “I think Russia is probably one of the most hated markets in the world. I don’t think many people have a nice thing to say about Russia or Putin. I was pessimistic on Russia from 1966 to 2012—that’s 46 years. But I’ve come to the conclusion that since it is so hated—and you should always look at markets that are hated—that there are probably good opportunities in Russia right now.”

Rogers was too early in terms of price – as most contrarians are – but not necessarily in terms of value. Price will eventually catch up with value.