Two themes have dominated much of the positioning in both the global equity and fixed income markets in 2013:

1) Fears of a China slowdown have hurt the emerging markets and all commodity-related sectors and countries.

2) Speculation about the Fed tapering bond purchases sent long-term bonds considerably higher, leading many to question their positioning for a rising interest rate environment.

Russia has been one of the most severely depressed markets. MSCI Russia trades at a 50% discount to MSCI Emerging Markets (EM) on 12-month forward-looking P/E ratios. These valuations are historically cheap, with levels not seen since the first quarter of 2009, the bottom of the global bear market.

Since mid-June, Russia has displayed some relatively strong performance compared to its emerging market peers. We believe this rally was underpinned by attractive Russian equity valuations, but we also note that the performance coincided with a recent rise in U.S. interest rates. Below, we explore why rising interest rates may coincide with a relatively strong performance for Russia. [Russia ETFs Struggle]

Additionally, the high beta of Russian equities may lead to a cyclical rebound that is greater in magnitude than that of its peers. In Table 1 we look at MSCI Russia’s outperformance against MSCI EM after MSCI EM’s lows of March 2009. We note that in all three periods, MSCI Russia outperformed MSCI EM in its one-year forward returns: by 24.90%, 17.17% and 3.86%, respectively.

Table 1: 12-Month Forward1 Total Returns Post-MSCI Emerging Market Lows2

Is the Recent Rebound Credible?

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