Going Long Russia: Part 1

Jim Rogers is one of my favorite investors to listen to. Truth be told, every Sunday I search YouTube to see if there are any newly released videos of Jim Rogers’ views on economies and markets. Rogers is one of the greatest investors of all time, joining forces with George Soros to create the Quantum Fund. Since around 2015 – 2016, Jim Rogers has expressed bullish interest in Russia, and it was my first semester Sophomore year of college that I listened to his bullish hypothesis. Two years later, Russia is still high on Rogers’ bull list. Internally recognizing my contrarian investing habits, I became enamored with the idea of a Russian turnaround. Yet, it doesn’t matter what I think or what I hope, what matters is the reality and scope of the situation, and the likelihood that my thesis will play out. This piece will go into my bullish hypothesis on Russia, while at the same time providing two companies that I am looking to invest in within Russia, as well as a couple different ways to play the undervaluation in the Russian Economy.

Valuation

Russian markets are cheap, really cheap. Compared with the rest of the world, Russia presents the best bargain for investor money. In fact, Russia is the cheapest valuation by far, and the closest competitors are right around them, making East Asia an extremely interesting area of investment for myself. My favorite website to find valuations for global economies is StarCapital.de, a Danish company providing impressive and thorough research on global markets and valuations.

Russia ranks #1 in their Valuation category with a CAPE Ratio of 5.3, down from the 5.9 mark it reached right around the Trump Election. The ratios get more impressive from there. Russia is trading 7.1 times Earnings, 4.6 times Capital, 0.9 times Book Value, and 0.8 times Sales. These numbers would be a great screening measure for individual securities let alone global economies. With the valuations being where they are, I’m wrestling with the best ways to play the Long Side of the Russian economic bounce-back. I’m going to present a few ideas, but I would love for some commentary or some criticism. If you can, please shoot bullets into these ideas. Shoot bullets in the comments or email me at bbeylo@gmail.com.

How to Go Long Russia’s Bounce – Back

1. Long Russian Ruble – Currency Trade

I will provide a portfolio update on my paper account on TradingView, but this was one of the first ways I decided to play the long Russian hypothesis. My thesis for going long the Ruble is that the market is leveraged long, be it for the optimism in the market, and the theory that things must and should get better with time. Because of this, the markets tend to skew in the favor of the bulls over time. That being said, the probability of a harsher reverse against my position would be less if I went long the Ruble, as opposed to short the US Dollar compared to the Ruble. This still isn’t a bad idea, and in any case, you could do a spread trade, going long the Ruble and then shorting the US Dollar. The spread trade would provide beta to the portfolio and be a good hedge.

Right now on my Ruble trade, I risked around 0.60% of my portfolio with a stop around the 0.017329 range. I risked a smaller amount at the front of the trade, because I want to try to pyramid my trades to see how the ending P/L results. If the trade moves in my favor I will increase my position and move up my stops.

2. Long RSX Vanex Vectors Russian ETF – Equity Trade

I initiated a long position in RSX in my paper account over the last couple of weeks. Risking 1% of my capital, I bought in at 20.78 and placed my stops around the 19.70 mark. The stops were placed right below the 50 MA average, so if my stop-loss gets triggered, it would signal the reversal of the trend, and it would confirm that I was incorrect on my hypothesis.

This position is pretty straightforward and doesn’t really require too much technicality as opposed to trading the currency of the Ruble. Where is the greater risk/reward set up? To be honest, I’m not totally sure yet. I’m around 1.5% invested in Russia right now between the two positions. However, that could change with the third option.

3. Long Russian Companies

This would be the highest risk play, but at the same time the highest rewarding play in the bullish Russian Hypothesis. Now it begs the questions: Which companies and in what sectors? I will be attaching a part two to this article sometime later in the week (End of Semester Finals are doing a number on my ability to analyze a bunch of companies!), but let’s start with the sectors. There are two main sectors that I want to focus on when it comes to investing in Russia: Agriculture and Oil & Gas. This is straight out of Jim Rogers’ philosophy, and I am in full agreement with him.

Agriculture

On the agricultural side, Russia is poised for tremendous growth. According to an RT.com article from 2015, Vladimir Putin is set to expand and propel the organic agriculture frontier in Russia, with hopes of making Russia the worlds first global leader in Organic Agriculture. In his annual address, Putin stressed the importance of deregulating business, saying an “army of inspectors” (a post-Soviet hangover) interferes with business in Russia and promised change (RT.com). But the need for an agricultural revolution goes farther than reducing the red tape. Russia is truly experiencing a revitalization that nobody is talking about, mainly due to the predisposed negativity the United States has against Russia.

A Birth Rate Revolution

During the 1990’s Russia was in the middle of a birth rate crisis, with each generation following producing less and less babies. At that rate, the Russian population would eventually dwindle down to zero, and that didn’t account the massive amount of people fleeing the country. Its a much different story nowadays. Through some research I found out about Total Fertility Rate (TFR from here on out), which measures the amount of children a woman could theoretically produce in her child-bearing years. Towards the end of the 1990s, the TFR of Russia was 1.16, the lowest in Europe (Russia-Insider.com). However, in 2013 that number jumped to 1.73, and in 2014 it was trending even higher. A look at this graph from Russian-Insider.com shows the fertility rates for European Countries as of 2013. Right away you can see the drastic change in Russia’s TFR from 1990.

Fewer People Are Dying Early

One thing that really helps an economy is when people consume more goods that are being produced. One big factor in increased consumption is to make sure that your population isn’t prematurely dying. Russia used to have a dire problem. Their population was dying often and early. Right below is a chart from Russian-Insider.com that shows the deaths per 10,000 people from external causes (suicide, alcohol poisoning, and homicide). After reaching a peak in mid 1990s, the trend has been extremely favorable. 

Couple that statistic with the fact that life expectancy for Russia is increasing and you have a recipe for increased consumption, which in turn will bolster the economy of Russia.

Back to Agriculture

With that side-note out-of-the-way, let’s get back to agriculture. Putin recognizes the importance and the potential that agriculture provides for not only his people, but as an export to the rest of the world. This was Putin’s remarks on sustainable agriculture:

“We are not only able to feed ourselves taking into account our lands, water resources – Russia is able to become the largest world supplier of healthy, ecologically clean and high-quality food which the Western producers have long-lost, especially given the fact that demand for such products in the world market is steadily growing,” (RT.com). 

One of the major risks would be finding the amount of workers capable to produce such a capacity. Yet like we saw with the birth rates and the death rates, Russia is well positioned for agricultural growth. More details on specific companies will be coming in Part 2 of this Russia Series.

Oil & Gas

Russia is sitting on $35 Trillion worth of Oil. That’s worth repeating. Russia is sitting on $35 Trillion worth of oil. Russia’s new Military Base in the Arctic Trefoil will house about 150 Russian soldiers. The oil underneath the military base is considered to be valued around $35 Trillion. Since Russia owns that base, if extracted, it would mean HUGE potential for Russian oil and gas. It’s not a matter if you think green energy is the future, or if you are against the use of fossil fuels to power this country. The fact of the matter is that oil and gas will continue to run this country for as long as green energy can’t find a way to make their energy sustainable and affordable (Vocative.com).

An article in the Business Insider paints the picture perfectly on why Russia’s oil reserves will not die away anytime soon:

“Russia has been sitting on vast shale/tight oil reserves, which according to present data are second only to the United States. Yet it might easily surpass all its rivals, as the development of gigantic tight-oil formations, such as Bazhenov Suite, the largest shale deposit in the world covering a territory of more than 1 million km2 and assumed to contain at least 20 billion tons of oil, is still in its infant phase” (Business Insider). 

All of these data points are found with the sanctions still in place on Russia. One can only postulate that once sanctions are lifted, it will breathe a breath of fresh air into the surging Russian economy. A good way to visualize this potential catalyst is like when you start a fire, and the way to get the fire really burning underneath, to really heat it up, you blow oxygen in. That oxygen will be the lifting of the sanctions, and the coals will be the perfect value setup that is the Russian Economy.

Final Overview of Russian Economy

Before ending, I want to run by some numbers from the Russian Economy so that you get a better understanding of the turnaround that could be boiling in the Mother Land.

GDP Growth

Let’s start with GDP Growth Rate, the virtual thermometer for a nation’s production. russia-gdp-growth-annualRussia’s annual GDP growth was -0.57%. Now I know what you’re thinking, ‘It’s still negative’. Yes you’re right. But after a -1.31% growth rate in the previous year, -0.57% is a tremendous improvement. Breaking down the GDP growth a little further, Russia increased their GDP from Construction by 200 RUB Billion, and increased GDP from Mining by 30 RUB Billion.

Employment Numbers

Russia’s employment percentage leaped from 64.7% to 65.1% while at the same time russia-employment-ratedecreasing their unemployment rate from 5.6 to 5.4. Wage growth increased 0.5% and high skilled wages in the country jumped 1,000 RUB Billion. This is important because it means that the decrease in Russia’s unemployment rate isn’t due to low skilled part-time labor (the kind of jobs that are fabricated into the US unemployment rate to make it look better than it is).

Money & Trade

Russia increased its Money Supply M0 by 100 RUB Billion over the last year. Russia’s russia-money-supply-m0balance of trade declined over the last year close to 100 RUB Billion, mostly in part due to increased sanctions. Russia’s Current Account increased drastically by 21,000 RUB Billion. Despite increased sanctions, Russia was able to increase their exports by close to 100 RUB Billion. In terms of Gold Reserves, Russia increased its supply by 100 RUB Billion.

Debt

Russia increased its debt to GDP by 1.4% from 16.3 to 17.7%. This is more than fine with russia-government-debt-to-gdpme, in fact, it’s better than almost every other countries government. Due to sanctions, its government revenues are decreased substantially, but showing signs of up-trending.

Business Environment

Bankruptcies declined heavily over the last year by 200+ businesses. Due to sanctions, russia-bankruptciescorporate profits took a very steep decline in 2014 – 2015. However, since 2016, Russia increased it’s business corporate profits from 982.7 RUB Billion to 1649.4 RUB Billion. Ease of doing business increased from 36 to 40. Industrial production is up from -0.8 to 0.2. Steel production is up from 5585 Thousand Tonnes to 6185 Thousand Tonnes.

Retail Sales & Housing

russia-retail-salesRetail sales MoM increased from -2.3% to 7.9% last report. Retail sales YoY increased as well from -2.8% to -0.4%. Housing sales also increased from 3.9 to 4.9 over the last year.

Concluding Remarks

The evidence presented reveals the tremendous potential that is untapped in the Russian economy. I am speculating that a reduction in sanctions will further bolster the bullish hypothesis on Russia. To play the long game on Russia directly, I am long the Ruble by itself, but I also hinted at the option of shorting the Dollar vs. Ruble. Secondly, I am long RSX which provides exposure to the total Russian Market. Thirdly, I opened the door to the potential to invest directly into Russian companies, more specifically in Agriculture and in Oil & Gas.

In Part 2 I will go into the specific companies that I plan on looking further at for investment opportunities. As always, please feel free to shoot bullets into my thesis, and I would love to have a healthful discussion. The more feedback I receive the better I can get a grip on the situation and learn from other perspectives.

 

 

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