Just because something is cheap does not mean it is a good
bargain. Such is life for Russian equities and the relevant
. Amid slumping energy shares, the "R" in the BRIC acronym saw
its benchmark Micex Index slip to a three-month low on Tuesday.
The slide comes just a couple of weeks after some analysts and
traders started calling attention to attractive valuations among
In late October, the Market Vectors Russia ETF (NYSE:
), the oldest and largest Russia ETF, was
spotted trading at its widest discount to
the iShares MSCI Emerging Markets Index Fund (NYSE:
) in nearly three months.
Since October 29, RSX has slipped almost 5.1 percent as prices
have continued tumbling. The Russian government earns about half
its revenue from the sale of crude and natural gas,
according to Bloomberg
RSX allocated 41.6 percent of its weight to energy stocks as
of October 31, according to Market Vectors data. That would
normally be viewed as an excessive weight to just one sector for
any ETF, but the iShares MSCI Russia Capped Index Fund (NYSE:
) allocates almost 56 of its weight to energy names.
Predictably, it is slumping oil prices that have made Russian
equities and the aforementioned ETFs even cheaper. In the past
two months, Brent crude has lost about $8 per barrel. A
price-to-earnings ratio of just over five for the Micex is barely
more than half the P/E on the MSCI Emerging Markets Index.
Russian equities have the lowest valuations based on estimated
earnings among 21 developing nations, according to Bloomberg.
Historically, Russian equities have traded at a discount of 30
percent to the broader emerging markets universe, but the current
has been deemed "extreme" by some investors. As
of October 31, RSX had a P/E ratio of 7.14 and a price-to-book
ratio of 0.86. On the same date, ERUS had a P/E multiple of 8.78
and a price-to-book ratio of 2.56,
according to iShares data
. The Market Vectors Russia Small-Cap ETF (NYSE:
) is even less expensive than its large cap-focused counterparts.
RSXJ's P/E ratio is just 3.49 and its price-to-book ratio is a
Russia does have some factors in its favor, including tame
inflation and a reputation for corporate profitability. Combing
valuations and the ability of Russian firms to generate profits,
the market does appear undervalued relative to other developing
With oil prices sliding and investors skittish about the
impact of Europe's sovereign debt crisis on more volatile markets
such as Russia's, the valuation allure could be muted in the
near-term. Translation: ERUS, RSX and RSXJ are cheap now, but the
ETFs could easily get cheaper.
For more on Russia and ETFs, click
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