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Too Much Risk in Russia

MORNINGSTAR MINUTE: Russian stocks are incredibly cheap, but only investors willing to lose money should consider this market

Tim Strauts 13 January, 2015 | 9:30AM


Tim Strauts: In today's chart, we're going to look at the Russian stock, bond and currency markets in 2014 and examine the events that caused the Russian market to collapse. This chart looks at the performance of Russian stocks, Russian bonds denominated in US dollars and euros, the Russian rouble and oil prices. The data is as of Dec. 17, 2014.

The trouble for Russia started when Ukraine cancelled the planned trade deal with the European Union because of pressure from Russia. This sparked protests in Ukraine, which caused the current prime minister to flee. In January 2014, the Russian market sold off about 10% because of uncertainty about how Russia would react to Ukraine’s political transition. When Russia invaded the Crimea region, the stock market sold off even more but bottomed once Crimea joined the Russian Federation.

The Russian market bounced back as investors hoped the worst was over. By June, the stock market almost fully recovered from losses earlier in the year. But the stock market turned negative again once Malaysia Airlines Flight 17 was shot down. Then, the combined effect of US and European sanctions and falling oil prices pushed the Russian rouble and stock market into a tailspin.

The Russian bond index used in this chart includes only bonds issued in the US or euro currency, so its returns are not affected by weakness in the rouble. Russian bonds started to sell off in November as it looked increasingly likely that the Russian economy would post negative GDP in the fourth quarter because of low oil prices and a collapse in currency.

The Russian stock market is incredibly cheap by any measure. But there are serious concerns about rule of law. And with oil prices in the [$50 range], the Russian economy will likely contract in 2015. Investors should strongly consider avoiding the Russian stock market unless they have a very high risk tolerance and are willing to potentially lose all of their money.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Tim Strauts  

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