In their latest episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discuss Is Russia A Big Opportunity Right Now? Here’s an excerpt from the episode:
Q4 2021 hedge fund letters, conferences and more
Is Russia A Big Opportunity Right Now?
Tobias: Let me segue like this. Is Russia a big opportunity right now? The Russian stock market?
Bill: It could be.
Jake: [laughs] Definitive answer.
Tobias: I saw a note from [unintelligible [00:34:14], which I thought was fun. Basically, I think Russia’s taken two provinces. He says that, “Europe doesn’t want to go to war over the two provinces. The US doesn’t want to go to war over two provinces. Also, there’s a lot of gas that comes out of there. So, there’s fertilizer and a whole lot of other things that go into food production and so on.
So, if there’s a war on that front, then inflation is going to go bananas in the States and there’s an election coming up. So, it’s highly unlikely that that goes ahead.” I don’t know whether you need to know any of that stuff or not, look at– The Russian stock market is cheap. It’s always been cheap. The question is, do you want to play something speculative like that? This is not an investment. This will never wind up in anything that I do, but I’m just interested in, because this has Value: After Hours. We can talk about this stuff.
Jake: Well, so, I will say that I have owned Russian securities before and I dealt– [crosstalk]
Tobias: Through an ETF or directly?
Jake: Both. You always had that overhang of mafia-style government and who knows what’s going to happen.
Tobias: Is that a positive or a negative?
Jake: [laughs] Well, I think other governments are showing their hands a little bit lately too as being a little more authoritarian than everyone might have thought lest we in glasshouses throw too many stones. Yeah, it’s always been, is this a mispriced bet or not? Of course, it’s cheap and it might cheap for a good reason, and it also might be too cheap for the reason, and for you to figure out on your own and your risk tolerance. So, this is what opportunity can look like potentially. Scary headlines create mispriced securities.
Bill: What does the Russian stock market trade at relative to US financials and international energy–?
Tobias: It’s been a huge discount. It’s been a huge discount for a long time.
Bill: Yeah. That’s how I would think about it is.
Jake: Yeah.
Bill: Because the whole business over there is commodities and financials. It’s not going to trade at a big multiple.
Jake: Yeah. Will you be doing like Gazprom to Exxon calculations?
Bill: Yeah. I think you got to comp it to something like that to figure out whether or not it’s actually worth the [crosstalk] discount.
Tobias: I remember when Meb launched his G-Val and one of the things that G-Val does, I think the first screen, it’s a CAPE of global markets, and then he looks for something within each global market. The cheapest global market at the time that he wanted was Russia. I think that [crosstalk] there was a bank.
Bill: I talked to him about this. I said it to him, but I do think the question that you got to ask yourself is index composition. Russia doesn’t have Silicon Valley. So, it’s just not going to trade– It should trade at a discount.
Tobias: Yeah. But that’s the point that I was making, that it’s always been at a discount. It may always trade at a discount.
Bill: Yeah, I guess if we’re saying that the US stock market is– I’m not even sure that it’s a discount depending on what your definition of a discount is. I think it should trade cheaper and it’s probably justifiably cheaper. Whether or not it’s too cheap, I have no idea.
Jake: There are some interesting stats though on CAPE and historical what it looks like. I wrote it up at one point probably a couple years ago in one of my letters. If you look at CAPE on– I think below 5 CAPE, there is no incident in the dataset where you had negative 10-year returns. Literally, you’d never lost money if you– [crosstalk]
Tobias: Is that US only or is that global?
Jake: No, this was global, I think. I’m pretty sure. I’d have to go back and make sure.
Tobias: Because I do remember that after G-Val came out that Russia had a very good run for a period there. It might have been same. How long ago you were you buying, I mean, you’d have to discuss current stuff, but how long ago he buying Gazprom and what were you buying? Not necessarily Gazprom, the names–
Jake: I owned most of my Russian exposure was probably like 2017 to 2020-ish.
Tobias: Yeah, I think it was maybe even a little bit earlier than that when it came out. Maybe 2016 or 2015, something like that.
Jake: Yeah. It was cheap. Price to book on what I was buying typically was well below 50 cents on the dollar. I sold that when I got closer to $1 and happily moved along.
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Article by Johnny Hopkins, The Acquirer’s Multiple.
