The Russian Stock Market as an Emerging Market Play

Warren Buffet: “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”

One of the most fearful stock markets in the world now is probably the Russian stock market.  It’s hard hit by the recent plummeting oil prices and sanctions by the West for its Ukraine adventure.  Both its stocks and the prices of ruble are hitting new lows.  But then, make no mistake about it, the R in BRICS is still a resource rich country with its huge land masses and untapped potential.

So, the million-dollar question is: is it time to be greedy?  Would you grab hold onto a falling knife?  Why won’t a falling market continue to fall?  My approach is that yes, the market is uncertain, but, it’s already high on the value-play list; so, I joined in the fun and bought some.  If Russia goes up, I’ve some extra pocket money; if it tanks, which it might, it’s nothing major on my financial well being.

This web page here listed Russia’s Shiller P/E as 4.6.  The author even predicted its expected return to be 16.9%.  I think that is a pretty bold assertion, but then if Russia manages to fix its problems, why not?

Why The Average Investor’s Investment Return Is So Low

According to the latest 2014 release of Dalbar’s Quantitative Analysis of Investor Behavior (QAIB), the average investor in a blend of equities and fixed-income mutual funds has garnered only a 2.6% net annualized rate of return for the 10-year time period ending Dec. 31, 2013.

The same average investor hasn’t fared any better over longer time frames.  The 20-year annualized return comes in at 2.5%, while the 30-year annualized rate is just 1.9%. Wow!

The above is just one of the many studies that revealed the plight of Joe investor.  While institutional investors are reaping market returns; individual investors, because of agency and behavioral issues etc, suffer mediocre growth in their assets.  Similar studies in Singapore based on our CPF accounts exposed comparable dilemma.

Valuations of the Various Stock Asset Classes

Benjamin Graham of value investing fame wrote in the book The Intelligent Investor, “Current price should not be more than 1.5 times the book value last reported.  However, a multiplier of earnings below 15 could justify a correspondingly higher multiplier of assets.  As a rule of thumb, we suggest that the product of the multiplier times the ratio of price to book value should not exceed 22.5 (This figure corresponds to 15 times earnings and 1.5 times book value.  It would admit an issue selling at only 9 times earnings and 2.5 times asset value, etc.)”

I’m of the opinion that Benjamin’s writings are pretty sage from the perspective of a value investor.  Let’s take a look at the prices of worldwide stocks in the various asset classes based on Mr. Graham’s sayings.  Since Vanguard publishes the two parameters for all of its stocks’ ETF, I shall use this fund company info for this purpose.  As listed on its website:

Asset class P/E P/B P/E * P/B
Global ex-US REIT 10.5 1.1 11.6
Emerging 13.9 1.7 23.6
US Financial 17.5 1.4 24.5
All-world ex US 16.7 1.7 28.4
Small-cap value 21.4 1.8 38.5
All-world ex US small-cap 20.0 2.5 50.0
S&P 500 19.1 2.7 51.6
Small-cap 27.2 2.3 62.6
US IT 21.2 3.9 82.7
US REIT 57.9 2.2 127.4

From the table above, the most glaring contradiction must come from the polar opposite of US and ex-US REIT sectors.  Ex-US REIT is the most value-y while US REIT is priced like it will have tremendous growth ahead (which I don’t think will be likely to materialize).  Perhaps 10 years down the road, we’ll most likely see a profitable delta of ex-US REIT over US REIT, considering the pricing disparity.

Of all the asset classes listed above, only Global ex-US REIT is comfortably within the limits set by Mr. Graham.  Emerging markets and US financial are also close and worth considering to overweigh in one’s portfolio.

Overall, most of the world’s stock markets are overpriced.  Everything is expensive!

Expected Returns of the Straits Times Index ETF

The SPDR STI ETF is a buyable security that is representative of Singapore’s Straits Times Index.  The ETF has low costs and is priced at about 1/1,000 of the index.

In this article, I’ll attempt to estimate the expected returns of this ETF if held over the long term, assuming that the economics and valuations of the stock market in the future do not differ much compared to today.  The followings are the fundamentals of the ETF as of today:

Distribution Yield 2.74%
Price/Cash Flow 9.50
Price/Earnings 13.27
Number of Holdings 30
Price/Book Ratio 1.28
Weighted Average Market Cap SGD $26,991.30 M


At the current P/E ratio of 13.27, the ETF has an average valuation compared to the historical norms.  The estimated net asset value per share is about $3.2 with an expense ratio of 0.3%.

Expected returns (per share) = dividends – expenses + capital appreciation

The dividends per share are 2.74% of $3.2, which is equal $0.088.

The expenses per share are 0.3% of $3.2, which is equal $0.010

Since the price/earnings is 13.27 and price is $3.2, earnings per share equals 3.2/13.27 = $0.241.

After the ETF pays out a dividend of $0.088, it will add to itself a retain-earnings of $0.241-$0.088 = $0.153.  Assuming that the market prices retained-earnings at a ratio of 1.28 (just like today’s P/B ratio), the addition to book value of $0.153 will cause a capital appreciation of $0.153 * 1.28 = $0.196.

As per the equation above, expected returns (per share) = 0.088 – 0.010 + 0.196 = $0.274

Assuming that years down the road, P/E remains at around 13.27 and P/B around 1.28, in percentage terms, the expected annualized return will be 0.274/3.2 = 8.6%!  This is pretty close to the ETF’s performance of 8.39% since its inception in April 2002!

US Stock Market Valuation

I do not invest in the US market right now, but I do look at the fundamentals of US as a value investor.  One of the parameters I often refer to is the P/E ratio.

The P/E ratio for the trailing 12-month earnings right now is 19.86.  If we take the historical average of 15 as being fairly valued, the US market is 32% overvalued over its historical norm.

If we look at Shiller P/E ratio which takes 10-year average earnings, the figure is 26.5.  The historical average of Shiller P/E is about 16.  That would mean by that standard, the market is now 66% overvalued.

While the P/E ratios have considerable forward-looking predictive value, markets are also pretty noisy in nature.  It’s unknown when the current bull market in US stocks will end.

A bit of a financial history, the dot-com bubble peaked in 2000, the real-estate bubble peaked in 2007.  So peak-to-peak it lasted 7 years.  7 years have lapsed since the previous peak in 2007.  The question is – is the US market at a peak right now?  Only God knows.

As a counter argument against the above, yields on bonds right now are also at record lows.  Since bonds compete against stocks for capital, that will mean that stock prices are not as unattractive as they look.  Given the lack of alternative outlets, stocks should rightfully trade at a premium to historical prices.  As to how much of a premium it should justifiably trade, let us evaluate.  At a P/E ratio of 19.86, that would mean an earning yield of 1/19.86 = 5.0% for stock.  The 30-year treasury bond now yields 3.1%.  Is that earning delta reasonable?  You’ll have to be the judge.  Of course, if bond yields revert to its historical average (which is higher), it’ll exert downward pressure on the stock prices.

Do tread carefully in this field.


According to the latest SPDR report I received in my mail, “The SPDR Straits Times Index ETF, Singapore’s first locally created exchange traded fund, is designed to track the performance of the Straits Times Index.”

Its inception date is 17th April 2002 and it has been around for about 12 years.  The price is approximately 1/1000th of STI and it’s available for purchase using the CPF investment scheme in the ordinary account for amount over $20 thousand under the current MAS policy.

The assets under management for this ETF is over $400 million, so the chances of this fund getting liquidated over the long term are pretty slim.  Like most diversified ETF’s, it’s a good medium as a long-term investment, and trading for the short-term is not recommended.

For an investor who invests in this fund since its inception till the month end as of 28 Feb 2014, the return is 8.20% inclusive of transaction cost and dividends in SGD.  This return is splendid, especially considering that over this period, the SGD has appreciated much over the USD.  The return figure quoted in a global financial currency such as USD will probably be much higher.  At that rate of past return, it beats inflation in a meaningful way and provides the investor a real appreciation of his funds.

Over the same period of time, the return for HDB flats in general, without taking into account of upkeep cost and rental, is around 6.5%.  It would mean that the SPDR STI ETF provided a similar rate of return without the requirements of a huge outlay of capital, at a lower cost, with better diversification and liquidity and with the ability of subdivision of your holdings into smaller lots to be purchased and sold over time.

As with all stocks, the SPDR STI ETF is pretty volatile over the short term of a few years.  Witness the drop of the STI index from the high of 3800 level to less than 3100 level during the recent financial crisis and the fall from 2500 level to the 1250 level during the dot com bubble burst.  Stock market panics and blooms are common and cannot be avoided and furthermore is the very reason why stocks long-term returns are higher than staid investments such as bonds.  The stock market is the manifest of the mantra of high-risks high-returns and no-pain no-gain.  What the investor can deal with the situation is to take a long term view of the stock market and invest for the long term – let the ebbs and flows of the price cycles cancel out each other over the long term and achieve meaningful returns over periods of decades of investment.

It’s important for the investor not to place short-term funds designated to fund items such as near-term house purchases or college funding to a volatile asset class such as stock ETF.  It’ll not be optimal to purchase the STI ETF at a temporary high price and encounter a bear market thereafter.  The investor will then be faced with a financial straitjacket of having to lock into capital losses if he/she needs to en-cash the funds to meet his/her needs.  The ideal investment for STI ETF will be for your retirement, college funding for your infant, or as a bequest which allow capitalism to do its magic over decades down the road.

The STI ETF is well diversified with a slight tilt towards banks.  The first, third and fourth by holdings are DBS, OCBC and UOB.  This perhaps reflects the fact that Singapore is a major financial hub.  The index also contains some companies based overseas in countries/regions such as Hong Kong; examples of such companies are Hong Kong Land and Jardine Matheson.  All in all, even though the index is based on stocks traded in SGX, it’s globally diversified as even companies based in Singapore such as Singtel and DBS have a large presence overseas.

The STI ETF is one such ETF that is physically replicated instead of others listed in SGX that are mostly synthetically replicated.  This would mean that the STI ETF will not have counter-party risks.  Its focus in large-caps, well-established companies is particularly assuring to the concerned investors.  The fact that this is an index fund with a low annual cost of 0.3% is an icing on the cake.

Personally, I’m dollar cost averaging into this ETF via my CPF OA.  At its current PE ratio of 13 to 14, it’s probably undervalued compared to S&P500.  If the future of Singapore and the region goes well, this should be a good investment.

GMO’s Quality White Paper


GMO’s Quality White Paper

The fund management company GMO has had previously released a particularly instructive white paper for value investors called “Profits for the Long Run: Affirming the Case for Quality”.  GMO has since taken the paper off their website.  I re-release it here for those investors who are interested in the findings.  The chart above is included in the white paper and is a summary of the whole white paper.

In short, low-risk stocks are more profitable and high-risk stocks are less profitable.  You can erase the concept of “nothing ventured ,nothing gained” off your investment dictionary.