Is
Russia a good buying opportunity? That was one of the questions posed by Brian
Sullivan of CNBC's Street Signs and it is an important one to consider, given
the enormous amount of investment mantras that have been perpetuated by the
conveniences of the internet. Some pieces of advice, such as not putting all
your eggs in one basket, maintains a universal leverage in our financial
protocol. Others, such as "buying on the dips," or as the Oracle of
Omaha once quipped, "being greedy when others are fearful," can be
rather questionable depending on the circumstances. With a dynamic geopolitical
event such as the Russian invasion of sovereign Ukraine, Mr. Sullivan was
absolutely correct in leading off the Russian investment discussion with an
inquiry : should we embrace the volatility as we have been told to do (by Wall
Street)?
It truly depends on what type of investor you are : if you want to take brazen risks and play off the known fundamentals, such as an extremely low P/E ratio for the Moscow index, or an equally distressed price-to-book ratio of 0.5, then the current discount could be an opportunity of a lifetime. That's assuming, however, that the price won't get discounted at a steeper rate in the near future. And that could be a very big assumption.
Consider the reasons why a retailer discounts a product, which all fall under two categories : progressive and regressive. A progressive discount is a forward-looking strategy and this is applied with commonly known variables, such as seasonality trends or new product launch dates. A retailer is looking to maximize impact by combining the attractiveness of a particular product with an underlying fundamental driver, such as Christmas shopping season, or a marketing blitz with publicity and multi-layered pricing combos.
A regressive discount, on the other hand, is a completely different animal. Even though the nominal benefit to the consumer can be the same as a progressive discount, the retailer is attempting to dump an unattractive product deemed as such by the free market. In this situation, the retailer has already absorbed the costs and expenses of selling, and holding, an underperformer, and the only incentive in the discount is to mitigate a negative impact.
Getting back to the original discussion of Russia, history has already proven that the old Soviet system of proletariat-led economics simply doesn't work. Vladimir Putin's obvious efforts to re-institute the Soviet Union 2.0 has all the hallmarks of further failure : poor GDP per capita, over-leverage on commoditization, rampant corruption, and ultimately, capital flight. And with armed conflict against NATO forces not an unreasonable possibility, this is sending investors over the edge.
In fact, the signs of "market mitigation" is evident with Russia. Their stock market hasn't held up well since running parabolic from the initial stages of their bull run during the late nineties until the 2008 financial collapse. Attempts to re-capture former glory have failed and miserably so. The most optimistic risk assessment is that the Russian markets regain their previous highs prior to their invasion of Ukraine (which really wasn't that high to begin with) and then go on to flounder in a consolidation pattern. Of course, the greater risk is of geopolitics escalating into violence, which would likely lead to a total collapse of the Eastern European economy.
It truly depends on what type of investor you are : if you want to take brazen risks and play off the known fundamentals, such as an extremely low P/E ratio for the Moscow index, or an equally distressed price-to-book ratio of 0.5, then the current discount could be an opportunity of a lifetime. That's assuming, however, that the price won't get discounted at a steeper rate in the near future. And that could be a very big assumption.
Consider the reasons why a retailer discounts a product, which all fall under two categories : progressive and regressive. A progressive discount is a forward-looking strategy and this is applied with commonly known variables, such as seasonality trends or new product launch dates. A retailer is looking to maximize impact by combining the attractiveness of a particular product with an underlying fundamental driver, such as Christmas shopping season, or a marketing blitz with publicity and multi-layered pricing combos.
A regressive discount, on the other hand, is a completely different animal. Even though the nominal benefit to the consumer can be the same as a progressive discount, the retailer is attempting to dump an unattractive product deemed as such by the free market. In this situation, the retailer has already absorbed the costs and expenses of selling, and holding, an underperformer, and the only incentive in the discount is to mitigate a negative impact.
Getting back to the original discussion of Russia, history has already proven that the old Soviet system of proletariat-led economics simply doesn't work. Vladimir Putin's obvious efforts to re-institute the Soviet Union 2.0 has all the hallmarks of further failure : poor GDP per capita, over-leverage on commoditization, rampant corruption, and ultimately, capital flight. And with armed conflict against NATO forces not an unreasonable possibility, this is sending investors over the edge.
In fact, the signs of "market mitigation" is evident with Russia. Their stock market hasn't held up well since running parabolic from the initial stages of their bull run during the late nineties until the 2008 financial collapse. Attempts to re-capture former glory have failed and miserably so. The most optimistic risk assessment is that the Russian markets regain their previous highs prior to their invasion of Ukraine (which really wasn't that high to begin with) and then go on to flounder in a consolidation pattern. Of course, the greater risk is of geopolitics escalating into violence, which would likely lead to a total collapse of the Eastern European economy.
Those
not convinced with the bearish argument for Russia can simply look to Germany's
stock market. While the peak-to-trough performance of German major cap equities
is not as impressive as Russia's, that could be a good thing. After all,
excessive range in price volatility usually begets more volatility, and this is
exactly what we have seen in the Moscow exchange. In contrast, Germany's stock
market has largely resembled our own S&P 500 index, which recently eclipsed
all-time records prior to the current downturn in the global economy.
This is
not to say that people should blindly put their money into Germany or other
Western European regions simply because they are not Russia. The EU has a
plethora of problems to deal with on their own, and this latest drama is adding
more fuel to the fire. But if long-term sustainability is the goal, it's
difficult if not outright dangerous to overlook Europe in favor of Russia.
The political dialogue is telling : while Russia undoubtedly took the bait and threatened to cut off natural gas pipelines, which feed approximately 30% of the EU's consumption, the Western front have responded with a forward-looking inquiry, which may now accelerate discussions of alternative energy sources such as shale gas and the importation of energy from North American refineries. What the West lacks in an immediate, guttural response to Russia is compensated with an innovative vision for the future.
But what will Russia's response be twenty or thirty years out? Could an economy that is largely based on commodities and energy production survive a price war once other sources become viable? Even if no new production is brought forth, the exponential curve of technological advances cannot be assumed to stay constant. Every year, vehicles are produced that meet higher standards of efficiency and many companies involved in transport and logistics have implemented solutions to counter rising costs. And the bubble of energy costs themselves are not guaranteed to stay lofty indefinitely. There are too many questions that an otherwise antiquated Russian economy will find extremely challenging, if not outright impossible, to answer.
Without getting into the granularity of finance, of which there are several, Russia will find itself in a world of trouble if they continue in their line of belligerence. Although the consequences may not be immediately evident, the infrastructure of an economic system mired in focal singularity cannot support a multi-faceted attack of brunt competition, innovation challenges, market volatility and geopolitical paradigm shifts.
The political dialogue is telling : while Russia undoubtedly took the bait and threatened to cut off natural gas pipelines, which feed approximately 30% of the EU's consumption, the Western front have responded with a forward-looking inquiry, which may now accelerate discussions of alternative energy sources such as shale gas and the importation of energy from North American refineries. What the West lacks in an immediate, guttural response to Russia is compensated with an innovative vision for the future.
But what will Russia's response be twenty or thirty years out? Could an economy that is largely based on commodities and energy production survive a price war once other sources become viable? Even if no new production is brought forth, the exponential curve of technological advances cannot be assumed to stay constant. Every year, vehicles are produced that meet higher standards of efficiency and many companies involved in transport and logistics have implemented solutions to counter rising costs. And the bubble of energy costs themselves are not guaranteed to stay lofty indefinitely. There are too many questions that an otherwise antiquated Russian economy will find extremely challenging, if not outright impossible, to answer.
Without getting into the granularity of finance, of which there are several, Russia will find itself in a world of trouble if they continue in their line of belligerence. Although the consequences may not be immediately evident, the infrastructure of an economic system mired in focal singularity cannot support a multi-faceted attack of brunt competition, innovation challenges, market volatility and geopolitical paradigm shifts.
