Tags: Russia | oil | Olympics | Iran

Russia – The Feared Frontier

By    |   Wednesday, 22 Jan 2014 07:01 AM

In this country, fear sells.

Fear is the major driver of markets in the United States. The fear of a terrorist attack has spawned billions of dollars in security devices, systems and products that should make us safe. The NSA, TSA, CIA, FBI and countless other alphabet agencies are allowed a free hand, even at the cost of personal liberties being trampled, under the pretext of fear.

Yet there is one market that has been hit hard due to the fear of the stereotype. Russia is a feared country to do business in. Just recently, news of a possible terrorist strike in Sochi, where the winter Olympics will be held in a few weeks, has the U.S. government parking planes and other assets around Russia in case of a crisis.

While I would agree that there is just cause to establish the stereotype, the facts speak for themselves here. Bloomberg gives the Russian stock markets a price-earnings (P/E) ratio of 4.4. This valuation is what one observes just around a severe crisis in the markets. The Russian market is at about half of its 15-year average and half of what it was in 2007.

While global governments have pumped in about $8 trillion dollars' worth of liquidity in the markets leading to asset bubbles all over, the Russian stock markets are actually deflated. All of this is caused by the fear of mistrust and deceit that surrounds Russia.

Granted the Russian president has not helped the situation with incidents like imprisoning political dissenters and stifling productivity by allowing bureaucracy and red tape to flourish. The reality is that there is an active and vibrant economy that still functions in Russia. Business still happens and regular economic cycles still operate.

Last year was a particularly bad year for Russia. The GDP growth rates floundered at about 1.5 percent for the year. As a result of the slowdown, the inventory levels that are maintained on a general basis have now depleted and the effect of restocking inventory will give a significant boost to the Russian economy. I predict that Russia will grow at a healthy 3.5 percent, if not higher. This would bring back confidence into the markets.

If Russia can pull off Sochi Olympics without incident, we will see the investment dollars begin to flow back into Russia. Interest rates that peaked at 5.5 percent last year as the central bank forcefully tackled inflation have now declined to where they will hold steady, but the desired effect is already taking hold. Mortgage applications are on the rise, leading to a sustained increase in property prices again.

As a result, I expect an over performance in the Russian markets in 2014, and with the Ruble no longer in decline, we can expect a healthy return from the Russians.

The only possible challenge to the Russian growth story would be if we see a glut in the supply of oil by the end of 2014. If Iranian oil comes online in 2014, we will see a glut of supply and oil may decline to the low $70s. Then we cannot expect the Russian (or Canadian) economy to sustain such a decline and the Russian market will decline. But the Iran deal is not done and we will have to see if the oversupply in the oil market actually happens.

I would suggest looking at the Russian exchange-traded funds, but keep a close eye on the world oil supply for any reversals.

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Advani
Russia is a feared country to do business in. Just recently, news of a possible terrorist strike in Sochi, where the winter Olympics will be held in a few weeks, has the U.S. government parking planes and other assets around Russia in case of a crisis.
Russia,oil,Olympics,Iran
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2014-01-22
Wednesday, 22 Jan 2014 07:01 AM
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