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Is It Time to Buy Russian Stocks?

NEW YORK (TheStreet) -- Since Russian President Vladimir Putin began to threaten Ukraine, Russian markets have sunk.

During the past three months, iShares MSCI Russia Capped Index Fund (ERUS) has dropped 15.9%, according to Morningstar. Now Russian stocks have reached levels that haven't been seen since the global financial crisis. The forward price-to-earnings ratio of the iShares Russia exchange-traded fund is four, compared with 16 for the S&P 500.

"Russian stocks are among the cheapest in world," says Vitali Kalesnik, head of equity research for Research Affiliates, which operates the RAFI benchmarks used by such ETFs as PowerShares FTSE RAFI Emerging Markets (PXH).

Kalesnik says that bargain hunters should turn their attention to Russia, because investors have overreacted to the political problems. Soon markets are likely to rebound.

To gain a rough idea of how Russian stocks might perform, Research Affiliates looked at market performances during eight earlier conflicts, including Russia's wars with Chechnya in 1999 and Georgia in 2008.

On average, stocks fell 14% in the first three months of the conflict. Then after several more months of bouncing on the bottom, the stocks began to rebound. Within eight months of the start of the war, markets had recovered fully.

"At the moment when the military action starts, investors pay a lot of attention to the conflict," Kalesnik says. "After a while, investors stop paying attention to the news and begin looking for cheap opportunities."

How should investors play a Russian rebound? Kalesnik says that his own RAFI funds are likely to excel when Russia revives. While typical emerging markets index funds have 5% of assets in Russia, the PowerShares FTSE RAFI Emerging Markets ETF has 11% in the country.

Schwab Fundamental Emerging Markets Large Company Index (FNDE) -- which also uses the RAFI system -- has 13% in Russia.

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