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Two Reasons the World's Most Misunderstood Market Is Set to SoarBy
Thursday, December 5, 2013
There is perception… and then there are the facts.
And when it comes to Russia, the gap between the two is very wide...
In yesterday's essay, I showed you just how far Moscow and Russia have come over the years – despite what you see (and don't see) in the mainstream media.
And today I'm going to reveal a few reasons why this cheap, hated market could double your money over the next few years…
First of all, Russia is no basket-case economy... It's one of the better-run economies in the world.
Its federal government has the lowest amount of debt of any major global economy, at 8.4% of gross domestic product (GDP). By comparison, the U.S. has 102%. Russia's foreign currency reserves – which are the assets of a country's central bank – of $509 billion, are the fifth-largest in the world. Its national balance sheet is nuclear-bomb-proof, with a tiny budget deficit of about 0.5% of GDP. (In 2012, the U.S. had a budget deficit of 7% of GDP.) And unemployment stands at just over 5%, versus more than 7% in the U.S.
But it's widely hated... thanks in large part to one man – Russian President Vladimir Putin.
Putin is a semi-authoritarian strongman and former KGB spy who isn't shy about tossing people in jail if he doesn't like what they say. Human rights don't mean much in Russia with Putin as the leader of the country.
The data backs this up. Polling firm Gallup has been asking Americans their opinion of Russia for years. In 1989 – back when the former Soviet Union really were the bad guys – 29% of Americans had an unfavorable opinion of Russia (the Soviet Union).
Today, 50% of Americans view Russia unfavorably... 20 years after the end of the Cold War. And I'd guess a lot of that unfavorable vote has to do with Putin.
But as contrarian investors, there's nothing we like more than a market that's hated... because small improvements can generate outsized returns.
And that's exactly what I see happening…
Catalyst #1 Investors don't like Russian stocks because they hate Putin and all he stands for... But Putin may be changing (albeit slowly).
For example, the recent big election in Russia for the mayor of Moscow in September was the closest thing to a real election Russia has seen in years. The opposition was credible and was given space and time to present its case. This might not sound like much, but for Russia, it was a big step forward.
A journalist friend of mine who runs a business magazine in Moscow agrees: "There's some political opening, there's a greater focus on corruption... change is happening."
But overall, not many people think much will improve in Russia. They say Putin has already shown that he's not interested in change. He's also made it clear that he'd like to stay in office until 2024, and reform isn't on his agenda.
Expectations are so low that any small positive change on the political front could send Russian stocks soaring.
Catalyst #2 The Russian government has already made improving the country's business environment a priority. You see, Russia's business environment, like other emerging markets, is lousy. The paperwork to start a business, problems with getting permits, and accessing the electrical grid... are all an enormous headache for businesspeople.
But an annual survey carried out by the World Bank and the International Financial Corp. shows Russia is making progress. The country was recently ranked 92 (out of 189 countries) in the overall ease of doing business. It was rated 111 in the previous year's survey. For comparison, China is ranked 96 and India 134.
Although these sorts of surveys can be gamed – and this change by itself doesn't mean that much – it's encouraging that Russia is moving in the right direction. Also, the recent slowdown in economic growth – Russia's economy will grow only around 1.5% this year – might force the government to think about reform a lot more seriously.
So while it's true that Russia has plenty of challenges ahead, the country is slowly moving in the right direction. And even a small change for the better could propel stocks higher.
Good investing,
Kim Iskyan
Further Reading:
"If you want to make money investing abroad," Frank Curzio writes, "I suggest you listen to Chris Mayer." Capital and Crisis editor Chris Mayer spends most of his time traveling the world in search of the next big idea. And he says "at current valuations, Russian stocks look like a steal." Learn how to take advantage of this huge opportunity here.
Emerging markets are pushing higher for the first time in years. This is right in line with Steve Sjuggerud's economic recovery "script." And he believes the final – and most profitable – act is just beginning. Learn more here: Make Hundreds-of-Percent Gains in "Act III"... Starting Now.
Market NotesA QUICK 50% GAIN IN STEEL Our summer "steel call" is turning out to be a good one...
Back in August, we told you to consider steel stocks. Despite all the incredible "digital" innovations we enjoy, the world is still built on a foundation of steel, concrete, and other vital materials. Factories, cars, appliances, and bridges all require steel.
The steelmaking industry is one of the market's major "boom and bust" sectors. It experiences huge upswings... and then huge downswings. Get into the booms early, avoid the busts, and you can make great money trading steel.
Due to a weak global economy and excess production capacity, steel has been in "bust mode" for the past few years. Low prices have produced big losses for players like U.S. Steel (X). From early 2011 to mid-2013, the stock fell from $60 per share to $17 per share. We noted in August, "If things simply get a little 'less bad' for the sector, U.S. Steel and its competitors could easily jump 50%."
As you can see in the chart below, things have gotten "less bad" for the steel industry. And U.S. Steel has skyrocketed 50% since our note.
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