From Russia With Fear

12/27/2011 11:40 am EST

Focus: GLOBAL

Igor Greenwald

Chief Investment Strategist, MLP Profits

Investors are exiting Russian stocks as protests roil Moscow. That should set up a rebound come spring, writes MoneyShow.com senior editor Igor Greenwald.

It’s been a terrible year for tyrants and a lousy one for foreign equities. Stock markets banking on the staying power of autocrats have had an especially tough time, as Egyptian investors can attest.

Moscow stocks have been mangled almost as badly as Cairo’s this month, dropping 9% after mass protests challenging the rule of Vladimir Putin and the ex-KGB cronies in his retinue.

Traditionally cheap because of its reliance on oil and minerals and the caprice of its rulers, Russia has grown cheaper still, its equities now fetching less than five times earnings. The battered stock markets in China and Brazil are twice as dear. India’s remains three times more expensive despite doubling Russia’s decline this year.

Russia could grow even cheaper in the coming months. More than 100,000 people turned out in Moscow on Saturday for the country’s biggest protest in more than a decade. They were demanding a rerun of the recent fraudulent parliamentary elections as well as Putin’s defeat in the March presidential ballot, which could return the strongman to the Kremlin for up to 12 more years.

Foreign investors have already voted with their feet, pulling an estimated $80 billion from Russia this year, equivalent to 10% of the Russian market’s shrunken capitalization.

Managers drawn to Russian stocks as a value proposition are surely wondering if they’ve fallen into a value trap. The market remains unusually vulnerable to capital flight, which has clearly gathered steam of late.

Still, the dirt-cheap valuations provide some assurance that the selling won’t snowball. As long as oil prices hang around $100 a barrel, Russia will continue to enjoy some strengths, including economic growth above 4% and modest debt as a percentage of the GDP, a byproduct of previous defaults.

The Kremlin is showing every intention of buying as many supporters as possible. Military and police salaries are about to double, and more pre-election handouts are inevitable. Putin is promising growth as fast as 7% annually as part of his plan to create 25 million new jobs.

This is just talk while young Russians continue to leave for Canada and Australia. But there is $120 billion sitting in a rainy-day oil revenue fund, and foreigners are chasing yields into emerging market bonds, so there’s plenty of scope for pump priming.

The combination of high oil prices and rising government spending suggests that Russian stocks could rally next year. They might do even better if Putin were to concede the presidency to the officially encouraged challenger Mikhail Prokhorov, the billionaire magnate whose holdings include the Brooklyn Nets. But that just means more money will be spent to make sure Vlad triumphs.

Some of that money figures to trickle down into Moscow stocks over time. If so, the Market Vectors Russia ETF (RSX) should benefit.

As ever with Russia, it’s a matter of timing. In this game, the early bird often gets cooked for its trouble. Waiting for a pre-election sale is the safer bet.

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