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The pick of world markets from 2019 is still historically cheap

Russia was one of only two stockmarkets to return around 45% in 2019 – the other was Greece – and yet it is still trading on a valuation well below its long-term average

13/02/2020

Juan Torres Rodriguez

Juan Torres Rodriguez

Research Analyst, Equity Value

The recent impressive progress of the Russian stockmarket came to an abrupt halt last month. Perhaps investors were worried about the coronavirus or the resignation of the country’s cabinet or maybe they were just taking profits – as we have explained before, in articles such as Single month of data and Two sides to every story, we strive to avoid imposing any narrative on investments, here on The Value Perspective.

That is because creating any kind of ‘narrative fallacy’ around an asset only serves to distract investors from an objective assessment of its risk and reward. Still, whatever the potential explanations for Russian stocks’ recent reverse – giving up all the ground they gained in the first two weeks of the year – now is a good time to pause and reflect on the performance of a market that has largely passed under the radar of most investors.

Let’s take 2019 in isolation first. After all, if you had asked investors around the world to select a single country’s stockmarket to back for 12 months from 1 January last year, not many would have plumped for Russia. And yet, in US dollar terms, Russia was one of only two markets to return around 45% in 2019 – the other being Greece, which seems just as unlikely to have been many investors’ first choice last year.

Strikingly, however, Russia has continued to trade on a very cheap multiple – which, as we discussed recently, was also the case as it embarked on the run that ended up making it The best major market of the last 21 years. As we have explained in articles such as Only fools and bourses, one of our favourite metrics, here on The Value Perspective, is the cyclically adjusted price/earnings ratio.

Known for short as the ‘CAPE’, this encapsulates the average earnings generated by a market over the last 10 years, adjusted for inflation, which allows for a meaningful comparison of investment performance over time. Back in 1998, as the country endured a financial crisis and investors took their cash elsewhere, Russia traded on a CAPE of 1.3x; today it is still only around 7x – well below its long-term average of closer to 11x.

As we have noted before on the subject of investing in emerging markets, such as Russia, Baron Rothschild is credited with coining the brutally pragmatic investment wisdom, “The time to buy is when there’s blood on the streets”. Less jarring to 21st Century sensibilities, perhaps, would be Warren Buffett’s advice to “Be fearful when others are greedy and greedy when others are fearful” – or indeed, as we ourselves have previously argued: “In difficult and volatile markets, let valuation be your guide.”

Author

Juan Torres Rodriguez

Juan Torres Rodriguez

Research Analyst, Equity Value

I joined Schroders in January 2017 as a member of the Global Value Investment team. Prior to joining Schroders I worked for the Global Emerging Markets value and income funds at Pictet Asset Management with responsibility over different sectors, among those Consumer, Telecoms and Utilities. Before joining Pictet I was a member of the Customs Solution Group at HOLT Credit Suisse.  

Important Information:

The views and opinions displayed are those of Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans, Simon Adler, Juan Torres Rodriguez, Liam Nunn, Vera German and Roberta Barr, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated.

They do not necessarily represent views expressed or reflected in other Schroders' communications, strategies or funds. The Team has expressed its own views and opinions on this website and these may change.

This article is intended to be for information purposes only and it is not intended as promotional material in any respect. Reliance should not be placed on the views and information on the website when taking individual investment and/or strategic decisions. Nothing in this article should be construed as advice. The sectors/securities shown above are for illustrative purposes only and are not to be considered a recommendation to buy/sell.

Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.