This country’s return is 4 times better

Probably no body will be interested in this country’s stocks but believe or not, it is much better than the US stocks with higher return potential and better valuations. I’m talking about Russia’s stock market. For this year, the Russia stock market (ETF: RSX) is returning 4 times better than S&P (+30% vs +7%). Even better, this has not yet included its dividends at about 3%. It sounds unbelievable as Russia is largely dependent on its resources, mainly oil and natural gas, both of which have been beaten down so much in the past 1-2 years. How can Russia’s stock market perform so well? Well, it’s all about valuation. Regardless how bad a stock is, as long as it has values and its valuation is cheap enough, for sure at some point people will come in to buy. This is what has happened to Russia’s stocks. You may think about up so much, Russian stocks must be very expensive already. Wrong! It is still one of the cheapest markets in the world. At this level, RSX PE is only about 7 and is trading right around its book value (P/B 1.1). In comparison, S&P PE is 25 and P/B is 2.5. In other words, S&P is still 2-3 times more expensive than RSX. For sure Russian stocks are more risky and will be more volatile but for those with a long-term perspective and good risk tolerance, buying RSX will likely be doing much better than S&P in the next 1-2 years.