Things are not all well with Russian equities. The S&P Russia Broad Market Index has lost more than half its value in U.S. dollar terms since the summer. There is figurative blood on the streets. If we were to follow the example of the founding members of the Rothschild banking dynasty, we would be lending money to Russian companies and buying up their shares.
The case for investing in Russia now is certainly thought-provoking. At current prices, the Russian BMI is trading on a trailing price/earnings multiple of around four; the comparable ratio for the Global BMI is closer to twenty. At roughly 58%, Russian equity volatility is in the 87th percentile of historical readings since 1997 and, to borrow a perspective from our recent whitepaper, periods of high volatility have historically identified beneficial entry points for Russian equities, as the chart shows:
Source: S&P Dow Jones Indices LLC as of December 17th, 2014. Charts and tables are provided for illustrative purposes. Past performance is no guarantee of future results.
So is Russia a “buy”?
There are two things to bear in mind. First, somewhat obviously, patience may be required. Historically, the short-term returns from purchasing at above-average volatility are inferior. More importantly, the current geopolitical environment would suggest that things are as likely to get worse for Russian equities as they are to get better.
Secondly, the data in the chart above only go back to 1997. There is an obvious risk on relying too much on recent data. There was no S&P Russia BMI index a hundred years ago, but no doubt if there had been its volatility would have been quite high in 1917; the subsequent destruction of all forms of private capital would provide a counter-example to the general rule of buying at periods of high volatility.
This, of course, is not 1917. Neither is it the turbulent times of the Napoleonic wars that so rewarded the Rothschilds’ historical adventures. And despite the fact that recent periods of high volatility in Russian equities have represented attractive entry points, that may not imply anything about the current situation. But historically, in the long term, fortune has favoured the brave, especially (or perhaps exclusively) the patient brave. This is something to bear in mind as you consider the situation in Russia.