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Russian Stocks: A Good Contrarian Play

Thursday, October 20, 2016 4:25
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Russia flagRussian stocks have surged this year, but many U.S. investors are still afraid to touch them. Analyst Jeff Opdyke explains why they may be missing out on a big opportunity.

I am not in the mainstream consensus. I know this because the mainstream consensus tells me I’m an idiot. It tells me I’m out of step, square, unhip to the new reality in which stock prices go ever higher evermore. Price doesn’t matter. Logic doesn’t count. Gravity has been suspended — just like it was suspended right before gravity brought down the dot-com bubble and the housing bubble in flames of irony.

Pied pipers are paid to play beautiful songs that lure the gullible to untimely fates. Listen closely, though, and you’ll hear those songs for what they really are: dressed-up dirges as depressing as the lies the pipers peddle.

I believe U.S. stocks are dangerously overvalued. I believe the U.S. economy is a meth head addicted to the narcotic of free money and that the Federal Reserve is dangerously close to an epic crisis (no matter whether it raises or lowers interest rates). And I believe the U.S. dollar has all the strength of a 98-pound weakling strutting around Muscle Beach as though he owns the sand.

None of that matches modern memes that insist empirically overvalued stock prices are cheap. The pipers pretend the empirically weak U.S. economy is robust and the Fed is fully in control. And, they sing, the U.S. dollar will remain strong, despite four decades of evidence to the contrary.

But that’s Mr. Market.

Buyers forever battling sellers. Bulls and bears and all that. I just happen to be on the side the pipers currently label “curmudgeonly.” I’m the downer when they’re pushing uppers on the suckers — the voice of reason when they want you to suspend your disbelief.

So you probably shouldn’t listen to me when I tell you I am buying Russian rubles these days…

I like what few others are paying attention to. Opportunities hide there.

I bought oil stocks in the late ‘90s when the world couldn’t care less about $15 crude. I bought pharmaceutical stocks in the early days of the first Clinton administration, when Hillary went rogue on the industry and undermined the stocks. I bought McDonald’s at $18 in 2002 when the Street seemed certain the Golden Arches were out of step with the times and St. Jude Medical below $7 a share in 2000 when the Street cared little for the medical-products company. Still own both today, up 550% and 1,120%, respectively.

Contrarian moves, all. And all panned out well.

Russia is my contrarian move today.

Clearing Away the Propaganda

The consensus insists that an investment in Russia is ill-advised. It’s an oligarchy (said as if the U.S. isn’t). It has dangerous, imperialist ambitions (again, said as if the U.S. doesn’t). It’s run by a dictator-by-another-name. The political and economic system is rigged. The economy is screwed. The list goes on.

Some of that’s true. Most of it is Western hyperbole, because, after all, it’s Russia, and the West loves to fan Russian hatreds.

I was in Russia this past summer. The situation isn’t dire. The economy isn’t in shambles. Tourists still crowd Red Square. Café Pushkin still serves the best stroganoff ever. Russians are living their lives, and life goes on largely normally.

Russia represents an opportunity because the value of Russian assets — particularly stocks and the local dinero — are mispriced. Sure, reasons exist for a certain amount of weakness in both Russian stocks and the ruble. The economy thrives on oil, and low oil prices have taken their toll to a degree. But much of the asset-price destruction Russia has experienced in the last year or so is tied to a narrative that is dead wrong — the U.S.-fueled theme that Putin wants to rebuild the Soviet Union, that the Crimea annexation was proof of that and that he now has designs on tiny Baltic states or Poland.

We will charitably call all of that “misdirection” or, maybe, “propaganda.”

There are reasons the U.S. needs this viral meme. Reasons military leaders want us to believe imperialist lust lurks in Putin’s soul. I will only offer that, based on direct conversations I’ve had inside of Russia, your average Russian wants nothing to do with a revived Soviet Union. And they want even less to do with imperialism for the same reason Donald Trump hates on immigrants — Russians are sick of interlopers. They’re tired of poor, non-Russians invading the country and taking jobs. And they absolutely loathe the notion of returning to a system in which Moscow must fund satellite nations.

So, Russia isn’t the scary beast we’re led to believe she is. She’s just America from a different perspective.

And she’s a market misunderstood by much of the West.

The VanEck Vectors Russia ETF (NYSE:RSX) closed at $18.73 on Wednesday, up $0.21 (+1.13%). Year-to-date, the largest Russian equities focused fund has gained 27.85%.


The VanEck Vectors Russia Small-Cap ETF (NYSE:RSXJ) closed at $32.80 per share on Wednesday, up $0.63 (+1.96%). Year-to-date, the only Russian small cap equities ETF has surged 71.73%.


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