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3 Reasons to Invest in the Russian Stock Market Right Now

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Who’d have thought the Russian stock market would be the place to put some of your cash, especially now that Moscow just annexed part of another sovereign country and the threat of wider conflict between Russia and Ukraine may be looming?

Because of the volatility of the situation, Russian investors have begun to flee their own stocks; to date, a falling ruble and other economic problems there have led to a 20 percent reduction in the Russian stock market.

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Which is precisely why now might be the time to get in, say U.S. investors.

“[The] sell-off has taken the market to technically extreme oversold levels,” Jacob Nell of Morgan Stanley wrote in an investor’s note March 4, when the crisis was just beginning.

“Valuation multiples have only been cheaper at the depths of the 2008 crisis (when earnings fell by 60%). And oil markets are stable in contrast to sell-offs in Russia historically. Despite the obvious hit to growth expectations implied by the crisis, any sign that tensions are beginning to de-escalate would constitute a buying opportunity.”

Granted, cheap valuations don’t mean that returns will be quick, but you get the idea.

With the Crimea vote for independence and annexation into the Russian federal now past, U.S. market conditions are improving. Wall Street is rising steadily once again after comments by Russian President Vladimir Putin signaled that tensions over Ukraine would likely abate.

“What had been going on in the Ukraine has been weighing on the minds of investors for a while, so it is a relief that we are apparently moving beyond this,” said Joseph Tanious, global market strategist at J.P. Morgan Asset Management in New York.

“While from an economic standpoint the Ukraine doesn’t have a major impact on the global economy, there were worries about more tension between Russia and western powers, and how far this kind of standoff could go.”

Something to think about moving forward as regards your investment portfolio. Virtually all major global events affect markets.

Yet two days ago the White House issued a warning amid U.S. sanctions which froze assets of both Russian and Ukrainian nationals. Today, Russia responded with sanctions of its own against top U.S. officials, barring them from entering the country.

John McCain brushed off the sanctions with a joke, ”I guess this means my spring break in Siberia is off, my Gazprom stock is lost, and my secret bank account in Moscow is frozen.”

However, speculation over Russian ruble and stock markets in Europe and Russia continue. Over the past few days, investors have been eying the ruble and Russian markets which rallied despite the increased tensions and warning issued by White House Spokesman Jay Carney:

REPORTER: The Russian stock market has been soaring the past couple of days. Is this a sign that the sanctions are ineffective if they’re not really paying a cost? And the reality is it’s up about eight-, nine-percent the last couple of days, their main stock exchange.

JAY CARNEY: I think it’s down for the year, and I think the ruble has lost its value, and I think that he long-term effect of actions taken by the Russian government in clear violation of the United Nations charter, in clear violation of its treaty commitments, that are destabilizing and illegal will have an impact on their economy. All by themselves. They will also incur costs because of the sanctions that we and the EU have imposed, and there will be more actions taken under the authorities that exist with the two executive orders that the president has signed. So I wouldn’t — I wouldn’t, if I were you, invest in Russian equities right now… unless you’re going short.

While the White House tends to avoid commenting on shifts in financial markets, Carney said U.S. and European sanctions, compounded by Russia’s aggressive takeover of Crimea, will hurt Russia’s economy.

However, with risk comes opportunity. And “the riskier the stocks the better” says financial columnist and former management consultant Brett Arends.

Arends provides three reasons why he is going to invest in Russia despite the fact that it is a corrupt dictatorship embroiled in international crisis with its leader risking isolation and embargo.

1. The Moscow stock market is just on the cusp of a rare and exclusive club.

The 60% club, reserved for asset classes which have fallen more than 60% from their all-time peak. The Moscow market plunged on Monday in the wake of President Vladimir Putin’s invasion of the Crimea and the potential for a war over the Ukraine. Stocks had already fallen a long way in the preceding few years. This week saw panic.

The Russian market is down 59%, in US dollar terms, from the all-time high seen in the spring of 2008, according to market data firm MSCI.

Even better? Russian small cap stocks nearly entered the 80% club. On Monday, they were down 78% from their peak in December 2007.

These really are rare clubs. Past members of the 60% club include Las Vegas real estate (2011), gold bullion (2000), the Nasdaq Composite index (2002), and the Nikkei 225 (2001).

Cue the Bennett Rule, named for my old friend Peter Bennett, a veteran and highly successful money manager at Walker Crips in London: Always take a wager on a durable asset class (i.e., not, say, Pets.com) when it joins the 60% Club. Over the following five years you will almost always make a handsome profit.

It’s rough and ready, but there is sense to it. When an asset has fallen that far, it’s usually oversold. The market has given up and lost interest. Naturally it doesn’t always work, and things can go down quite a way further before bottoming out. A few very rare assets join the 80% club. One or two join the 90%. But if you hang on, it really doesn’t matter.

2. Everyone else is too afraid to.

Look around. Are you seeing lots of money managers and analysts buying and recommending Russian stocks? Of course not. That’s the point. They’re too afraid.

You didn’t see these people being bullish of, say, gold at $250 an ounce, or Las Vegas real estate in 2011, or Greek stocks in 2012.

The comedian John Cleese once said the typical Englishman’s highest ambition was to go through life without ever being embarrassed. Money managers and Wall Street analysts are in the same boat. Embarrassment is professional death.

And, all other things being equal, when so many people are constrained from being bullish it would tend to make an asset underpriced.

3. They are cheap.

The Russian market trades on just five times forecast earnings, according to estimates. Small company stocks, which have fallen further, seem even cheaper. Of the top holdings in the Market Vectors small cap Russian fund, several are just three times forecast earnings.

The world market trades on 15 times forecast earnings, and United States stocks 17 times, according to estimates.

Yes, there are plenty of risks. But that is a major reason the stocks are already so cheap.

When we buy a share we are just buying a share of a company’s future cash flow. That’s it. And, by definition, the less we pay for each dollar of future cashflow, the better the deal. I don’t think I’ve ever seen a solvent company’s stock trade on three times forecast earnings before.

Remember this is still speculation and you should probably consult your portfolio manager before taking the leap into the Russian market.

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Market Loses 500 Points, More Pain Could Be In Store For Investors

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Market Losses 500 Points, More Pain Could Be In Store For Investors

With the Dow Jones Industrial Average dropping as much as 900 points yesterday before recovering to close out “only” 500 points lower, many are speculating that there’s even more pain in store for investors over the coming weeks.

One of the big differences with yesterday’s plunge was the stocks that slipped the most. Earlier in September, tech and growth stocks fell the most during the market pullback. Yesterday, it was the cyclical stocks that were heavily tied to economic recovery.

Sam Stovall, the chief market strategist at CFRA, wonders if the possibility of a second lockdown has spooked investors.

“Things had to have changed for investors to be so nervous. With Europe starting to see a sharp increase in Covid cases, does that mean they’re going to reimpose shutdowns?”

He also says that the weak recovery from the early-September pullback indicated more drops before the market would finally march higher.

“Because the recovery from the earlier Sept. 8 low was so anemic, it was an indication that the market needed to go through more backing and filling before it’s ready to advance.”

Technical analysts are now pointing to the 200-day moving average as a potential battle line for the markets. That currently stands at 3,104.

Scott Redler, a technical strategist and partner with T3Live.com, says the S&P 500’s next test could be the psychological level of 3,200 before potentially slipping down to the 200-day moving average. “I would say there’s a high probability we at least test 3,200 if not the 200-day.”

He added that the S&P 500 chart looks to be forming a head and shoulders chart pattern, which is a negative sign for stocks. “That would give us a measured move down to 3,136,” he said.
Redler said the market has been flashing warning signs that a bigger sell-off was in store.

“There are four or five things that are nipping at the heels of the market,” he said. “In the last two weeks there have been many signals that this kind of action could happen.”

Paul LaRosa, the chief market technician at Maxim Group, also thinks a larger market plunge is in store. He said he expects the S&P could dip as low as 3,100, and Nasdaq could drop under 10,000 if it breaks support at 10,639. He said the Dow should see support at 27,450 but could slip down to 26,000.

Stovall added that the markets are in a seasonally negative time. This comes with September the worst month of the year on average. He also warns that with the end of the month coinciding with the end of the quarter, losses could accelerate as big investors rebalance their portfolios before the month-end.

Peter Boockvar, chief investment strategist at Bleakley Advisory Group, says we could be seeing investors shifting back to the “work from home” stocks as fears of a second lockdown grow.

“I think some of it is that [cyclicals] had a good month. I think you have the algorithms that say to buy the stay-at-home names after the drubbing that went on in Europe, with the possibility of the U.K. crackdown again, and what that means for growth. To me, this is an allocation shift. Let’s go back to buying Zoom, Walmart and Peloton and selling anything that’s leisure or travel-related. The sell-off in tech that started in early September started a very different tenor in the market. We were on a much more vulnerable footing going into today.”

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Gold Will Climb To $2,200 An Ounce By Year End, Says Industry Insider

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Gold Will Climb To $2,200 An Ounce By Year End, Says Industry Insider

Ronald-Peter Stoeferle, the managing partner of Incrementum, says gold is in a “stealth” bull market. Additionally, he expects prices to climb above $2,200 per ounce by the end of the year.

Speaking with Kitco News, Stoeferle says proof of the stealth bull market in gold is actually silver outperforming gold and junior mining stocks outperforming senior mining stocks.

“It’s pretty obvious, we’re in a stealth bull market in gold. What are the reasons for that? First of all, we’re seeing that gold is rising in every currency. Gold is up 27% in US dollar terms, we’re seeing that silver is outperforming gold, so silver is up almost 50% since the beginning of the year, so the gold/silver ratio is falling is a great confirmation for the strength of gold. Then we are seeing that actually the mining equities are outperforming the price of gold itself, so we are seeing outperformance of the large caps versus gold, we are seeing the juniors outperform the seniors, those are all confirmations.”

A Sign of a Healthy Bull Market?

He says the recent pullback in gold prices is also a positive sign of a healthy bull market. Stoeferle says there was too much optimism as prices climbed and sentiment got too high.

“We saw that when gold went over $2,000 everyone was writing about gold and sentiment felt a bit too positive. Then we came down, but it seems that there’s so much capital waiting on the sidelines at the moment that we just don’t see any deeper correction. Can gold go to $1800, $1850? Of course. But it is just normal and healthy within the course of this bull market to take a breather.”

Institutional demand will take gold to $2,200 an ounce by the end of the year, according to Stoeferle.

“September from a seasonal perspective is one of the very best months for gold and I think we can easily go to $2,200 or even higher by the end of the year. The important message is we are in a stealth bull market, I think this party has only just begun, and we are seeing the most important driver going forward is the institutional demand is coming back and I think that is what is really going to move the price of gold.”

Benefits of Higher Inflation

He says that gold investors, mining stock investors and central bankers make odd bedfellows; all three benefit from one thing: higher inflation.

“Just look at inflation-sensitive assets like TIPS and also gold, silver, the commodity space, they are all rising pretty strongly in the last couple of months, so I think the market is already telling us: be careful, inflation is on the horizon. And that’s actually what the Federal Reserve and central bankers and politicians want. So you could say that gold investors and mining investors are basically sitting in the same boat as central bankers, which feels a bit odd.”

Very few investment managers have lived through a period of strong inflation or even stagflation, and Stoeferle says that means many will be caught under-invested as gold prices rise.

“The average investment manager nowadays is 52-years old so they have never experienced a period of long, strong inflation or even stagflation. So I think this will catch many, many investors on the wrong foot. And at the moment, 0.5% of all assets are invested in gold. So basically there is no allocation at the moment and this will change, and I think really this year marked the beginning of the public participation phase.”

That small allocation to gold will change as people start looking around for the best inflation hedge, says Stoeferle.

“I think with inflation being really what central banks and politicians want to see and want to achieve, many many investors will have to consider “what’s the best inflation hedge out there?” and I think gold made a really solid case not only over the last few decades but over the last couple of centuries.”

Allocation for Gold

Finally, he says a rule of thumb he has come up with is for 8% of your investment portfolio to be allocated towards gold. However, he acknowledges that there are many variables for each investor.

“We crunched the numbers and we came to a rule of thumb of 8-10%. But I think it doesn’t make any sense to stick to those numbers because it depends on the rest of your portfolio, it depends on your time preference, it depends on your risk preference and so on, but if you believe that inflation will become a concern, if you think that real rates will stay very low, if you believe at some point we will have to deal with our debt, then I think you should have a pretty high allocation to gold and also the mining space.”

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The Pandemic Is Transforming to Digital Economy

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Even before coronavirus, paper money and coins are generally considered dirty. With a full-blown pandemic, people are less willing to go outside and buy items. And even when they did, they avoided carrying cash to use it to pay for everything. By September, the pandemic has changed the way people look at cashless transactions. And the companies handling this digital economy? They’re laughing their way to the bank.

RELATED: We Underestimate How Strong The Economy Will Be In 2021

Cashless is King

Last February, mobile payment company Square reported that 5.4% of its stores are cashless. By April, the number of stores jumped to 23.2%. The number went down to 13.4% in August when the government eased restrictions.

For the same Square vendors, 37% of transactions were cash. Once Covid-19 went full-blown, it dropped to 33% by August. Compared to the year before, it stood at 40%. Under normal circumstances, a 7% drop usually takes three years to happen. 

Only 13.2% of Square outlets accepted online payments last February. By August, that number rose to 40%. Meanwhile, contactless payments increased 6.6% from February to August, settling at 70%.

Square economist Felipe Chacon thinks the new normal has included methods of payment. He said: “These new findings show a significant and stabilizing increase in cashless adoption rates compared to pre-pandemic, with business owners reliant upon contactless and online payments and consumers utilizing those alternatives. This signals that COVID-19 has already had what will likely be a lasting impact on consumer behavior.”

Fintech Outperforming Traditional Banks

As cashless/online payment gained ground, financial tech owners began growing too. CNBC reports that the total worth of Square, Visa, PayPal, and MasterCard is $1.07 trillion. This amount eclipsed the market value of America’s big six banks. Together, the value of  JPMorgan, Bank of America, Wells Fargo, Citigroup, Morgan Stanley, and Goldman Sachs is below $900 billion.

Investors have rewarded these companies, pushing their stock prices to new highs. Visa has grown from $180.82 in August 2019 and is now $215.71 a year later. Mastercard shares now cost $366.12 last August 28, but it was $281.37 a year before. Paypal increased from $109.05 in August 2019 to $204.48 after a year. Square rose from $61.84 to $155.93 in the same period.

These companies are now pushing forward to make their brands provide more. Square announced last Tuesday that Cash-App users can now get their wages ahead of payday. This encourages cardholders to connect their app with their direct deposit payroll. Venmo, a PayPal subsidiary, also lets users access earned wages. Meanwhile, banks need to deal with increasing loan defaults and low-interest rates. 

The March of the Apps

With the pandemic, people have now ditched passbooks and purses and switched to apps. It’s not only bank apps, but also an investment and financial planning apps. People will likely stick with the apps even after the crisis blows over. 

In a CNN interview, Plaid CEO Zach Perret noted the increase in users. He said: “What we’ve seen is that consumers during this period have increased their reliance on digital financial services built by banks but also, built by non-banks.”

Plaid is the digital infrastructure provider that links bank accounts to the apps. From March to May 2020, Plaid’s partner firms recorded a 44% increase in new users compared to last year. Despite the pandemic, Plaid had to hire an extra 20% of workers to keep up with demand. “I think the pandemic has made it incredibly clear that digital financial services are here to stay,” Perret said. Visa and Plaid have earlier announced that the former will buy the latter for $5.3 billion.

PayPal expects 70 million users new accounts this year, double the rate from 2019. Even the traditional banks saw its users shift to its digital persona. Bank of America CEO Brian Moynihan reported an influx of a million mobile account users. 22% of them were senior citizens who used to resist the bank’s digital versions. Merill Lynch’s digital log-ins spiked more than 100% from 2019. Even Robinhood, the popular stock trading app, outpaced gambling apps. With American millennials stuck at home, they used the time to bet on stocks. Robinhood traders were instrumental in fueling a Wall Street rally earlier this year. Last May, the app reported adding 3 million new users.

Watch this as CNBC’s Closing Bell talks about how fintech demand has been affected by the pandemic:

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Digital transactions are fast becoming part of the new normal. Not only are they designed for the pandemic, but they will also offer convenience after the outbreaks have passed. Do you have digital accounts in place at present? If not, what is holding you back? Share with us your opinions on how you plan to participate in the digital economy.

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