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Editorial June 28, 2002
Russian Markets' Paradigm Shift
By eXile Staff Browse author

Economic distress in America, sluggish growth in Europe and Japan, turmoil in Argentina, Brazil and Turkey -- nothing, it seems, can keep the Russian stock market down for long. Investors are buying on every dip, no matter how many World Trade Centers or Dagestani tuba players get blown up. So far, this has been exactly the right strategy, as the Russian stock market has continued to climb to new highs. For, if the market continues to climb and an investor has money in the market, then, logically, this means that the strategy of investing in that market was a sound strategy.

With most traditional valuation measures now suggesting that Russian stocks are well into overvalued territory, that value now exceeding infinity, can the Russian markets, which have soared some 350% over the past three years, continue to defy gravity?

We at the eXile think so. In our view, Russian stocks are very likely to continue to surprise the shit out of you, and we mean that in a good way.

Traditional valuation measures applied to the Russian market are backward looking. They put too much emphasis on such over-rated concepts as "the past" and all the baggage that goes with it. They, those damned traditionalists, dwell on all the ho-hum negativism associated with the fact that at one point the Central Bank had this tiny offshore bank that it was using to wash all of its IMF funds, T-bills and bonds, as well as to pad its books and earn tens of millions for insiders at the CB. Big deal. Whoop-tee doo. Oh gee, we're so scared of a little tiny girlie bank set up in Liechtenstein by the Central Bank. Ooh, oh no, we're so afraid!

Successful investing requires a forward looking approach and the ability to recognize change. That means, in plain everyday man's terms, that you have to just forget about what happened here with that whole 1998 thing, because you know what? It never happened. Forget about it. The key is to recognize change. How's this for change: the Russian market is up 350% over the past 3 years. The Nasdaq, just to give you a comparison, is down 70% from 2-1/2 years ago.

And yet hundreds of billions still pour into the American stock market, while only a few million still wash hands in Russia's market. We think that many investors are missing a fundamental and enormously bullish transformation taking place within Russia's financial markets and business world. The fact is that the Russian markets have performed beautifully for the past three years. And in the world of finance, money talks, and bullshit plops out in these green-brown ball-shaped forms which sort of look like yellow hay and mud.

Right now, we at the eXile see what we have termed a new "paradigm shift" emerging to become the primary driver of continued above-trend gains for Russian equities into the year 2002 and beyond. This shift does not relate to the economy, the country, or reality, all of which are hopeless. It relates directly to the fact that other people now think Russia is a good place to park their money since other people made so much money last year. And this, we believe, is forward thinking at its finest. For, this means that next year, other people will look at this year and see how much we made, and they'll want to get in, buy assets, and then sell them to investors who look at what happened that year, and so on, and so on. In our paradigm shifts, things like that 1998 thing just don't happen anymore. We have outgrown that. Don't worry about it, seriously. Ees no problemo, senor!

As Russia's economy becomes more mature, corporations are reversing their traditional role. No longer do corporations simply murder competitors, strip assets, steal from the Treasury and send all their money off-shore. Nope. Not really anyway. Not as far as we know. Today, corporations have employees who do things like brush their teeth and learn certain useful English phrases like, "Ze toilet ees down ze hall, to ze left." The reason, as we said, is that there has been what we like to call a "paradigm shift."

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