How to Invest in and Analyze Russian Stocks
Invest in Russia with Confidence
Russia has become a premier emerging market and member of the so-called BRIC nations following its explosive 700% growth between 2001 and 2006. Driven by large crude oil reserves and moves towards free-market initiatives, the country became a popular destination for many investors. The country's 2014 military intervention in Ukraine and a downturn in commodity prices have hurt its prospects, but investors should still keep an eye on this $1.6 trillion economy.
Stocks in Russia are traded on the Russian Trading System (RTS), which was established in 1995 as Russia's first regulated stock market. Since then, the exchange has expanded to include financial instruments ranging from cash equities to commodity futures. The RTS stock exchange markets are open from 9:30 a.m. until 11:50 p.m. Moscow time (GMT+3) and securities are traded in Russian Rubles.
How to Buy Russian Stocks
The easiest way to gain exposure to the Russian stock market is by purchasing U.S.-traded mutual funds, exchange-traded funds (ETFs) or American Depository Receipts (ADRs). Since these are traded on U.S. exchanges, investors can avoid the complexities and risks associated with directly investing overseas, such as tax concerns, execution risk, and strange trading hours.
Some popular Russian funds and ADRs easily available in the U.S. include:
- Voya Russia Fund (Mutual Fund: LETRX)
- Market Vector Russia ETF Trust (NYSE: RSX)
- Gazprom OAO (ADR) (Pink Sheets: OGZPY)
For those seeking more direct access, many U.S. brokerages offer direct access to Russia's RTS, but they often charge higher commissions for international trades. Those looking for full-service Russian brokerages also have many options, including the country's largest brokerage, FINAM. However, U.S. investors must pass through some key regulatory hurdles to set up an account with the Russian brokerage.
How to Analyze Russian Stocks
Investors that choose to invest in Russian ETFs or mutual funds will want to look at the country's economic health before making an investment decision. A wide array of information on this subject, including current events analysis and economic data, can be found on the World Bank's website. The International Monetary Fund (IMF) also provides valuable economic data.
Macroeconomic factors to consider include:
- Credit ratings: The country's credit rating represents the likelihood of a default on sovereign debt, which could negatively impact both bonds and equities.
- Growth rates: The country's economic growth rate is a good indication of how much growth investors can expect to see from stocks within the economy.
Investors that choose to invest directly in Russia's RTS can analyze stocks using the English version of the RTS website. From there, investors can find a link to the public company's website where annual reports and other important disclosures can typically be found. These reports are helpful when evaluating individual stocks or bonds rather than the broad economy.
Company-specific factors to consider are the same as you'd consider with a company based in the U.S., including:
- Valuations: How does a company or fund's valuation compare to domestic equities or other emerging market options?
- Financial performance: Have a company or fund's earnings been growing over time? Do the companies offer a dividend?
Investors should consider both macro and microeconomic factors when evaluating an investment, as well as how the investment compares with other investments in their portfolios. For example, Russia's economy may have contracted 0.2% in 2015, but the country's equity market may have appreciated if these losses were better than expected. GDP growth in 2018 surpassed expectations at 2.3%, but the World Bank's forecast for 2019 is more modest—down to 1.2%.
Risks Associated with Russian Stocks
Russia has become a risky emerging market ever since its 2014 military intervention in Crimea, Ukraine. Meanwhile, its reliance on crude oil exports has made it vulnerable to slumping oil prices amid global trade concerns. Many investors are also waiting for key economic reforms to take place and make the market more transparent and easier to access for investors. It's uncertain if these reforms will ever materialize.
Some key risk factors to consider include:
- Less stability and transparency: The U.S. stock market is widely considered to be a safe-haven for investors, so most foreign markets, including Russia's equity market, tend to be both more volatile and less transparent by comparison.
- Exposure to energy markets: Since oil and gas account for about half of Russia's revenues and more than 60% of its exports, most Russian ETFs hold as much as 40% of their assets in the energy sector, which translates to significant commodity risk.
- Potential for social unrest: Socioeconomic problems could cause issues for investors. Throughout 2019, multiple protests have seen thousands take to the streets of Moscow.
- Depletion of reserves: Russia depleted its reserve funds throughout 2017, and the fund was ultimately closed in January 2018. The roughly $17 billion left in the reserve fund at that time was moved to the National Welfare Fund.
Investors should consider these risks in the context of their portfolios. In a diversified portfolio, it might make sense to include exposure to Russian equities or bonds despite their higher risk. A diversified portfolio may increase long-term risk-adjusted returns.