I Wouldn’t Follow the Herd to the RTS Index

What benchmark index is up 113% since the beginning of 2005 and up 16% so far this year?

Russia’s RTS. That’s what!

Investors are flocking in droves these days to the Russian index — a market that has been relatively ignored for almost a decade.

In 1998, the country suspended foreign debt payments, and the RTS plummeted thereafter. Investors — and market experts — wanted nothing to do with Russian stocks. And when I say, “wanted nothing to do with them,” I mean it. Rather than invest in a Russian company ever again, the head of Moscow trust company Bankers Trust, Adam Elstein said he would prefer to “eat nuclear waste.”

The renewed interest in the market has been fueled by several factors:

— One of the most notable influences of late has been the country lifting its trade restrictions on Gazprom, the gas monopolist.

— High oil prices have translated to more investment dollars for Russia.

— Low interest rates in the U.S and Europe.

— Utility and Commodity-related issues can be picked up cheap, compared to similar opportunities in other global regions.

— The “follow the herd” mentality of many investors — foreign money was invested in Russian stocks at the rate of $1 billion a week last year.

The question is whether this market is sustainable.

I think not.

Many Russian companies have lots of assets, but little in terms of earnings — this is not a good sign for an index’s future. Stocks on the RTS look like they’ve profited more from hype than from value… and more than a few are too dependent on commodity trends.

While the numbers coming out of Russia certainly are interesting, I would be sitting on the sidelines of such stock opportunities, waiting for the companies to catch up to the publicity.