Countless pundits, investors, economists, and opportunists have said the same thing over the years, but that doesn’t make it less true. The easiest way to succeed in investing is to buy what everyone else doesn’t want to touch.
Of course, that’s easier said than done. Take Russia, perhaps the world’s cheapest market. Its largest companies trade at just six times earnings, and most also trade under book value.
The country has a government debt-to-GDP ratio of just over 13%, a fraction of what North American and European countries have to deal with. Compared to Japan’s staggering 238% debt-to-GDP ratio, Vladimir Putin’s country looks very conservatively managed.
Even though it has one of the lowest debt-to-GDP ratios in the world, Russian 10-year bonds have a current yield of over 9.3%. This compares to Greece, the poster child of government excess, which only gives investors 5.7% annually to hold a 10-year bond until maturity.
There are a couple of reasons why Russia’s debt gives investors such a generous yield. First, Russia is seen as a loose cannon. The country already defaulted on its debt in 1998, and Putin probably wouldn’t hesitate to do it again, as evidenced by his cavalier attitude towards the West. Also, investors aren’t really sure how this whole mess with the Ukraine is going to end, but there’s certainly a risk that Europe will move away from Russia for its energy needs, which would hurt its natural-resource-driven economy.
Russia is a cheap market, but has major problems. Sure, investors could buy an ETF that follows the benchmark like the Market Vector Russia ETF Trust (NYSE: RSX), but that doesn’t get away from Russia’s other problems, like the accuracy of its constituents’ financial statements.
Instead, I think investors should look at Canadian companies with exposure to the country, namely Bombardier, Inc. (TSX: BBD.B) and Kinross Gold Corporation (TSX: K)(NYSE: KGC).
Kinross Gold Corporation
Even though Kinross has operations in North America, South America, Africa, and Russia, its Russian mines get the most attention. Currently, about 30% of the company’s value consists of its two mines in Russia.
These are some high-quality mines. Their cost per ounce of gold is under $600, far below most competitors and a full 30% lower than the other mines the company operates. So far it’s been business as usual for the Russian mines, and company management has come out against the sanctions against Russia, possibly in an attempt to appease the Russian government.
The risk, of course, is Putin and his cronies seizing the company’s interests. The longer the war goes on with the Ukraine, the bigger this risk will be. If investors think the market is overplaying this risk, shares here represent a great entry point.
Bombardier, Inc.
Bombardier’s situation in Russia is a little more tricky.
Last year, the company entered into a preliminary agreement with Moscow to assemble 100 Q400 Turboprop planes in the country and then sell them back to the Russian government. The deal was worth $3.4 billion.
Then, in May, Russia’s industry minister announced the government wasn’t sure about the deal, citing sanctions and other concerns. At this point, the company and the government are still in negotiations, and Bombardier is moving ahead as planned, even without a firm deal in place.
Even for a company the size of Bombardier, $3.4 billion is a nice chunk of change. Once it announces the state of the Russian contract, the market will react. If investors get in now and the contract gets ironed out, shares will likely pop on the news.
There’s plenty of risk when investing in Russia, but the potential rewards are there. It’s a bit of a wild card since nobody knows what Putin’s plans are. Still, it’s something investors should at least consider.
