The Market Vectors Russia ETF (NYSEArca: RSX) has traded slightly higher to start 2015, a far cry from the 47.2% drop experienced by the largest Russia ETF in 2014. However, modest gains for Russia ETFs have not been enough for some investors to remain patient with the funds.
Money managers pulled nearly $40 million from RSX on Monday, the ETF’s largest one-day redemption since mid-December, reports Elena Popina for Bloomberg.
Monday was the first trading day after Fitch Ratings lowered Russia’s sovereign credit rating to BBB-, the lowest investment grade, with a negative outlook. [Russia ETFs Face Fitch Downgrade]
“The economic outlook has deteriorated significantly since mid-2014 following sharp falls in the oil price and the rouble, coupled with a steep rise in interest rates. Western sanctions first imposed in March 2014 continue to weigh on the economy by blocking Russian banks’ and corporates’ access to external capital markets. Having grown by just 0.6% in 2014, Fitch now expects the economy to contract by 4% in 2015, compared with our previous forecast of minus 1.5%, as steep falls in consumption and investment are only partially offset by an improvement in net exports, driven by a sharp drop in imports. Growth may not return until 2017,” said Fitch in a statement.
Since the start of December, investors have pulled just $22.3 million from RSX, a fraction of the ETF’s $1.4 billion in assets under management. Last year, investors poured $1.34 billion into RSX, more than double the amount that flowed into the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ).
With oil prices falling, investors are growing concerned that near-term upside is limited for Russian equities and the country’s risks another sovereign debt default, an offense it committed twice last century.
Standard & Poor’s placed Russia’s sovereign debt on CreditWatch with negative implications, indicating Russia could lost its already tenuous grasp on its investment-grade credit rating. In April 2014, Standard & Poor’s lowered its rating on Russian sovereign debt to BBB-, the lowest investment grade. [Risk and Reward With Russia ETFs]
However, some market observers believe fears of a Russian default are overstated.
“Russia’s current foreign debt is not large: $731 billion, or about 34% of Russia’s annual GDP. Direct government debt is $73 billion and state-owned banks and corporations owe an additional $304 billion. By international standards this is benign. U.S. external debt is close to 100% of GDP, for example. In consideration of Russia’s $478 billion currency reserves, accumulated over the past decade, it seems absurd to worry about default,” said Research Affiliates in a research note out Monday.
Market Vectors Russia ETF
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.