While the XXII Olympic Winter Games underway right now in Sochi, Russia, could investing in Russian stocks bring home the gold?
So far, Russian stocks as measured by the RTS Moscow are flat since the start of the Olympic Games but they're down nearly 7% versus an almost-flat S&P 500 index. To make matters worse for US investors in Russia, the rouble has also depreciated 7%. That means US investors converted their dollars to roubles at the start of the year to buy Russian stocks are down a bit more than 14%.
John Stephenson, portfolio manager at First Asset Investment Management, thinks investors should stay away from the Russian markets and believes the Sochi games highlighted some of Russia's biggest problems.
"Other than value, I don't see any reason," says Stephenson on investing in Russia, where the RTS stock index trades with a price-to-earnings multiple in the single digits compared to around 15 for the US benchmark. "Corruption is rampant. That's true in several emerging markets but it's certainly the case there."
(Read: Reporters vent on Twitter about Sochi hotels)
The press and athletes publicizing incomplete hotels with dirty drinking water aren't helping instill confidence in Russia, according to Stephenson.
"The pickup line now is 'Your poorly-constructed apartment or mine?' at the Games," says Stephenson. "It's just become the symbol of corruption."
Stephenson also cites Russia's 6.5% inflation rate, low wage growth, and the possibility of a general global slowdown as reason investors should look elsewhere for returns. "It ultimately adds up to not a really great story," he says.
Steven Pytlar, Chief Equity Strategist at Prime Executions, says that when investors buy the Russian market, they're really making a play on commodities.
"When we overlay the broad equally-weighted commodity index over the RSX (the ETF tracking Russian stocks), we see that they trade very closely," says Pytlar. "Basically, when you buy the RSX, you're buying a broad-weighted commodities index."
(See: CNBC's Commodities coverage)
Despite a recent upturn in commodities as measured by the Coninuous Commodities Index, Pytlar sees it as selling opportunity in the RSX, not a buy signal.
"Overall, both of these charts are in very strong downtrends," says Pytlar. "If we see the RSX moving higher, it probably would be a selling opportunity and we would expect to eventually fall back down over time."
To see the rest of the discussion on Russian stocks with Stephenson on the fundamentals and Pytlar on the technicals, watch the video above.
- John Stephenson