We Can't Rule Out The Worst-Case Scenario For Russian Stocks

Value investors are drooling over Russia where the stock market is down around 20% since the beginning of the year. It's the worst performing emerging market so far this year.

There's no shortage of reasons why prices are down. The economy is slowing, the ruble is tanking, and its leaders are posturing in such a way as to engage in a costly military action that could result in economic sanctions.

Relative to expected earnings, Russia is trading at a sharp discount to its emerging market peers.

"Valuations have fallen sharply, with the forward P/E down near 4.0x forward earnings, its lowest since February 2009, and the P/B has fallen to 0.7x, just 10% above the 2008-9 trough of 0.63x," noted UBS's Geoff Dennis.

But Dennis and his team aren't ready to scream "Buy."

"[T]he worst case scenario that Russia becomes uninvestible (capital controls, such as in Malaysia in 1998, and even the expropriation of foreign owned assets in Russia) with Russia kicked out of MSCI GEMs cannot be entirely ruled out," he warned.

For now, Dennis' is holding a "Neutral" view of Russia.

"Overall, our view is that investors should react to this crisis, not by cutting positions, but by rotating out of domestic names which are vulnerable to a growth slowdown into export names, which are more defensive to the weak Ruble," said Dennis.