Oxstones Investment Club™By Chris Hunter, International Living,
The day Warren Buffett became the world’s richest man for the first time, he went out and bought himself a hail-damaged Ford.
Although the damage to the bodywork was mostly invisible, the dealer was offering a heavily discounted price. Buffett knew a deal when he saw one, and he snapped it up.
This “eye for a bargain” is what has made Buffett rich, and it can earn you big returns too, if you’re willing to go against the crowd and buy stocks when most investors are running for the hills.
The 2008 crash and its aftermath have put many of the world’s stock markets “on sale.” Particularly in the emerging world, where stocks have taken a bigger hit so far this year than stocks in developed markets. Emerging market stocks are now valued at a low rate that you don’t often see. In fact, it’s only happened 2% of the time during the last 20 years.
For example, right now something rare and potentially very profitable is happening in Russia. Recent sell-offs mean Russian stocks are hitting value territory.
As measured by how much investors are willing to pay now for a dollar of yearly earnings (the P/E ratio), Russia is trading at more than a 50% discount to the S&P 500… and a big discount to emerging market stocks in general.
Some will point to long-term structural problems, corporate governance issues, and government corruption as reasons for caution.
But the Russian stock market has some unique advantages, too. For one, it has a track record of handsomely rewarding investors. In the 10 years to October 24 of this year, the MSCI Russia Index has delivered a 324% compounded return, measured in U.S. dollars. (Over the same time China gained 248% compounded, India gained 398% compounded, and Brazil gained 515% compounded.)
Another advantage that the Russian stock market has is its commodities strength. About 70% of the Russian stock market is made up of commodities-linked stocks. The country is the world’s largest oil producer and second largest oil exporter. It is also the world’s second largest natural gas producer and largest gas exporter (nearly twice the size of the next largest, Norway). This is interesting for two reasons.
First, because as more emerging-market citizens enter the middle class for the first time, they take a quantum leap in the amount of resources they consume. This means that demand for commodities will remain strong.
Second, because supply of key resources, such as oil, remains constrained following a 20-year bear market in resource markets between 1982 and 2002. This bear market crimped capital expenditures and eliminated productive capacity—reducing the market’s ability to respond to higher demand.
This means the secular bull market in commodities that began in 2002 remains intact.
Russia isn’t popular right now. In fact, it’s downright out of favor. But it has inherent strengths in a world of rising resource demand and constrained supply.
And just like Buffett’s hail-damaged Ford, it’s selling for a heavily discounted price.
Tags: bargain hunters, commodities, commodities-linked stocks, emerging market stocks, emerging markets, geopolitical risks, mining and energy stocks, Natural Gas, oil, russian stocks, Warren Buffett