Compared to other BRIC funds, the Market Vectors Russia ETF (NYSEArca: RSX), the largest Russia exchange traded fund trading in the U.S., has had a banner year, surging 15.4%. As emerging markets equities and ETFs have sharply rebounded in recent weeks, RSX has displayed its leadership, gaining more than 10% over the past month.
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 remain cautious over market outlook, and While President Vladimir Putin and other Russian politicians argue that the worst is over, the economy is expected to remain in recession for the year. Investors are also expressing concern regarding one of Russia’s worst recessions in the post-Soviet era. [Issues for Russia ETFs]
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.
However, for now, many investors are cutting their losses as outflows from emerging markets ETFs continue at a blistering pace. Developing world equities have to contend with plunging currencies, slack commodities demand and stumbling stocks in China, the largest emerging market. [Emerging Markets ETFs Keep Bleeding Assets]
Still, Russia is mired in its worst post-Soviet era recession.
“Recent underlying numbers are close to miserable. For instance, retail sales dropped 10.4% YoY vs. -9.3% expected, and capital investment declined 5.6%, although this was better than the -6.9% expected. Also, real wages figures were slightly better than expected, but -9.7% is still poor. Compared to the nominal wage growth of 4.5% in September, it’s clear where Russia’s main problem lies,” according to a Seeking Alpha post.
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.
“The low valuations accompanied by relatively healthy company fundamentals are luring a growing number of investors back to the Russian market. Earlier this week, retailer Lenta, known for its budget hypermarkets, successfully sold new shares and raised USD 150 million in capital,” notes the Seeking Alpha article.
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.