Long correlated to oil prices due to its nearly 43% weight to the energy sector, the Market Vectors Russia ETF (NYSEArca: RSX), the largest Russia exchange traded fund trading in the U.S., is down just 1.3% over the past month, but some market participants are doing even better with one of the most downtrodden emerging markets.
The combination of a weakening energy outlook and the depreciating currencies are dragging on the ETFs that cover the major exporting countries. For instance, the energy sector makes up more than 40% of the portfolio in RSX. Looking ahead, observers are remain cautious over the market outlook. While President Vladimir Putin and other Russian politicians argue that the worst is over, the economy is expected to remain in a recession for the year. Investors are also expressing concern regarding one of Russia’s worst recessions in the post-Soviet era. [More Issues for Russia ETFs]
“In fact, for hedge funds, Russia has been one of the biggest and best stories of 2015, turning in the only positive performance among all emerging market strategies and crushing the returns of traditional stock market indexes like the S&P 500,” reports Jeff Cox for CNBC.
In June, the Bank of Russia cut its one-week auction to 11.5% from 12.5%. Just six months ago, Russia’s central bank boosted its benchmark interest rate to 17% from 10.5%. However, rising inflation there is seen as a hurdle to additional easing. Last week, the Bank of Russia estimated June inflation to be 15.6%. [Russia Economy, ETFs on the Mend]
Investors could also be lured back to RSX and Russian stocks due to some of the emerging world’s cheapest valuations.
“To be sure, there could be trouble ahead. S&P’s Russia BMI Index has tumbled 4.4 percent over the past month, underperforming the 3.8 percent return from S&P’s global index. Still, the Russian index outperformed the global ex-U.S. index, which declined 4.6 percent, and is up 3.7 percent year to date, compared with the 8.2 percent decline in the global benchmark and the 9.5 percent drop in the global ex-U.S. Measure,” according to CNBC.
Nevertheless, more intrepid investors may target some of the cheapest emerging markets. For instance, Russi is currently the cheapest on absolute terms, with a forward P/E ratio for the MSCI Russia Index at 4.9, compared to its 5-year average of 5.2, according to Capital Economics.
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.