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Rushing to the Russians

Russian shares are rushing deeper into good value territory. This creates the crazy idea that we should have investments in Russian equities.  Falling oil prices will put a great crimp on Ecuador’s economy.  This will create some good values in Ecuador real estate so some value opportunity may arise.

There is good value growing in Russia as well.  As a value investor the idea is one of good logic. The Russian market may be one of the best values of all. The idea even becomes intriguing when you consider that 64 years yesterday, on Dec. 16, 1950, President Harry S. Truman proclaimed a national state of emergency in order to fight “Communist imperialism.”

The western world has been fighting since, but great progress has been made. There is little reason to assume that more progress won’t come.

See why Russian investments may make quite a lot of sense now.

First, a reminder. Tomorrow is the last day to order fresh Ecuador roses for Christmas and help the children of Ecuador.


Chart of iShares MSCI Eastern Europe ETF (symbol) ESR at Bloomberg.com

A November message at this site looked at how to use iShares MSCI ETFs as an investing vehicle for the Keppler Good Value Country Selection Strategy. There are 22 good value markets and the message showed 19 good value equity ETFs ranked by Keppler Asset Management. iShares has an MSCI Index ETF that offers a diversified portfolio in each of the markets, except the four Eastern Europe good value markets (Hungary, the Czech Republic, Poland, Russia).

iShares has only one ETF that covers all four of these markets, the MSCI Emerging Markets (EM) Eastern Europe Index (symbol ESR). ESR tracks the investment results of an index composed of Eastern European emerging market equities. The fund seeks to track the investment results of a free float-adjusted market capitalization index designed to measure equity market performance of the following four emerging market countries: the Czech Republic, Hungary, Poland and Russia.

Since Russia was making such waves in the Ukraine, I chickened out and stuck with ESR, the ETF that invested in all four of the European markets. This is not really following the strategy. By investing an equal amount in ESR as all the other ETFs, instead of choosing a diversified fund for each country, I short changed the weighting of the Eastern European countries.

Luckily this has been a good move in the short term, but this is short term thinking. Long term more Eastern Europe and Russia should be in the portfolio. These markets appear riskier but this appearance of risk normally produces some of the best long terms rewards.

Keppler’s Good Value Country Selection Strategy is to construct a diversified, risk-controlled, representative country portfolio in every BUY rated country, weighting approximately equally in each country. See Keppler Asset Management’s background and more about the strategy here.

I could have added four times as much ESR to stay with the strategy. By second guessing the plan, I started on a slippery slope that could lead to having no strategy at all. The Good Value Country Selection Strategy is time proven. This is a way of logically investing in good value. Profit in the strategy is increased because markets react to risk by creating value. High diversification and equal weighting creates safety. By filtering out the best value markets because of apprehension I broke the strategies’ discipline and reduced the profit potential.

The correction is to have four times as much ESR as the other ETFs. This would give equal weighting to all the good value markets.

Why Russia?

One year when I spoke at Jyske Bank’s Investing seminar in Copenhagen, one of the other speakers was Andrei Kozyrev, the foreign minister of the Russian Federation under Boris Yeltsin from 1990 to 1996. After the failed Soviet coup attempt of 1991, he found himself in Yeltsin’s team of young reformers, which included Yegor Gaidar and Anatoly Chubais, and shared their Western liberal-democratic ideals. This was one of the men who helped dismantle the Soviet Union. He gave an insightful speech which Merri and I really enjoyed.

Even better…Merri and I were then invited to have dinner with Kozyrev. This was an incredible treat in itself…worth the entire trip….to have several hours with this man who represents so much living history.

We talked about many things, why Russian bombers are flying again, will Putin remain in office and much much more. He asked that most of his replies be off the record.
One point he did say that I could share then and still can today: “To see what happens in Russia, simply watch the price of oil.

If, or rather, when the price of oil rises…. we can expect the ruble and Russian shares to regain strength.

Currently Russia has a triple crunch: lower oil prices, Western sanctions and an especially strong US dollar.

I am not suggesting that you speculate by investing in Russia. Logic simply suggests that if you are following a value equity strategy that you do not reduce your weighting in Russia.

bloomberg chart

Chart from BBC article “Russian ruble in free-fall despite shock 17% rate rise” (1)

The BBC article “Russian ruble in free-fall despite shock 17% rate rise” shows that even a rising interest rate of 17% has not calmed fears. One analyst is quoted in the article: “For investors wanting exposure to Russia, a long-term horizon and a strong stomach are both an absolute must.”

Later the Wall Street Journal wrote: “Russian Ruble Rallies After Interest Rate Rise”. (2)

Being able to ignore up and down news like this is why I like the Good Value Country Selection Strategy. This strategy ignores the anxiety of the short term news. Value investing does at times require a long term horizon. Logic makes the decisions. Diversification and equal weighting eliminate the need for a strong stomach.

The rising US dollar adds to Russia’s difficulties now. Eric Roseman wrote in the ENR Asset Management ENR Market Outlook for Advisory Clients: This year will go down in the history books as one of the worst for foreign currency investors. Every region has witnessed losses on dollar cross-rates with Europe
especially hit hard along with natural resource currencies.

The recent crash in crude oil has slammed energy producing currencies, including Norway, Canada and Russia.

The ruble ranks as the worst OECD currency in 2014, down more than 50% against the dollar.

The ENR Global Currency Sandwich which holds an equally-weighted basket of six currencies and gold, has declined a cumulative 6.86% this year.

Excluding gold, the currency sandwich has declined 7.4%. Norway takes the booby-prize as the worst performing currency, down 13.5%. Norway is a major
oil producing country.

The ongoing slide in Brent has taken a toll on the currency. The six currencies we hold and recommend include:

• Norwegian kroner
• Singapore dollar
• British pound
• Mexican peso
• New Zealand dollar
• Canadian dollar

You can invest in the Global Currency Sandwich or set up a portfolio of ETFs that track the Good Value Country Selection Strategy with ETR.

Learn more at www.enrasset.com

Or contact Thomas Fischer at Thomas@enrasset.com

If you are rushing to get into or get out of investments in Russia, forget it. Unless there is something to really know and know well, let logic rather than speculation be your guide. There is always something we do not know. That’s okay because with a good value discipline you can treat stock market ups and downs with equanimity. Diversify in good value and spend your life earning and learning rather than stressing and guessing.


(1) “Russian ruble in free-fall despite shock 17% rate rise”

(2) “Russian Ruble Rallies After Interest Rate Rise”