Russian Equities, ETFs: Cheap And Getting Cheaper

Just because something is cheap does not mean it is a good bargain. Such is life for Russian equities and the relevant U.S.-listed ETFs. 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 Russian stocks.

In late October, the Market Vectors Russia ETF (NYSE: RSX [FREE Stock Trend Analysis]), the oldest and largest Russia ETF, was spotted trading at its widest discount to the iShares MSCI Emerging Markets Index Fund (NYSE: EEM) 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: ERUS) 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 discount 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: RSXJ) 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 mere 0.83.

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 economies.

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.

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