There is perception… and then there are the facts.
And when it comes to Russia, the gap between the two is very wide…
In [Wednesday’s] essay, I showed you just how far Moscow and Russia have come over the years – despite what you see (and don’t see) in the mainstream media.
And today I’m going to reveal a few reasons why this cheap, hated market could double your money over the next few years…
[ad#Google Adsense 336×280-IA]First of all, Russia is no basket-case economy…
It’s one of the better-run economies in the world.
Its federal government has the lowest amount of debt of any major global economy, at 8.4% of gross domestic product (GDP).
By comparison, the U.S. has 102%. Russia’s foreign currency reserves – which are the assets of a country’s central bank – of $509 billion, are the fifth-largest in the world.
Its national balance sheet is nuclear-bomb-proof, with a tiny budget deficit of about 0.5% of GDP. (In 2012, the U.S. had a budget deficit of 7% of GDP.) And unemployment stands at just over 5%, versus more than 7% in the U.S.
But it’s widely hated… thanks in large part to one man – Russian President Vladimir Putin.
Putin is a semi-authoritarian strongman and former KGB spy who isn’t shy about tossing people in jail if he doesn’t like what they say. Human rights don’t mean much in Russia with Putin as the leader of the country.
The data backs this up. Polling firm Gallup has been asking Americans their opinion of Russia for years. In 1989 – back when the former Soviet Union really were the bad guys – 29% of Americans had an unfavorable opinion of Russia (the Soviet Union).
Today, 50% of Americans view Russia unfavorably… 20 years after the end of the Cold War. And I’d guess a lot of that unfavorable vote has to do with Putin.
But as contrarian investors, there’s nothing we like more than a market that’s hated… because small improvements can generate outsized returns.
And that’s exactly what I see happening…
Catalyst #1 Investors don’t like Russian stocks because they hate Putin and all he stands for… But Putin may be changing (albeit slowly).
For example, the recent big election in Russia for the mayor of Moscow in September was the closest thing to a real election Russia has seen in years. The opposition was credible and was given space and time to present its case. This might not sound like much, but for Russia, it was a big step forward.
A journalist friend of mine who runs a business magazine in Moscow agrees: “There’s some political opening, there’s a greater focus on corruption… change is happening.”
But overall, not many people think much will improve in Russia. They say Putin has already shown that he’s not interested in change. He’s also made it clear that he’d like to stay in office until 2024, and reform isn’t on his agenda.
Expectations are so low that any small positive change on the political front could send Russian stocks soaring.
Catalyst #2 The Russian government has already made improving the country’s business environment a priority. You see, Russia’s business environment, like other emerging markets, is lousy. The paperwork to start a business, problems with getting permits, and accessing the electrical grid… are all an enormous headache for businesspeople.
But an annual survey carried out by the World Bank and the International Financial Corp. shows Russia is making progress. The country was recently ranked 92 (out of 189 countries) in the overall ease of doing business. It was rated 111 in the previous year’s survey. For comparison, China is ranked 96 and India 134.
Although these sorts of surveys can be gamed – and this change by itself doesn’t mean that much – it’s encouraging that Russia is moving in the right direction. Also, the recent slowdown in economic growth – Russia’s economy will grow only around 1.5% this year – might force the government to think about reform a lot more seriously.
So while it’s true that Russia has plenty of challenges ahead, the country is slowly moving in the right direction. And even a small change for the better could propel stocks higher.
Note from Daily Trade Alert: If you’re interested in making money in Russian stocks, consider buying shares of Market Vectors Russia Fund (RSX) on Monday. In case you missed it, be sure to check out Frank Curzio’s alert on this opportunity.