The VanEck Vectors Russia ETF (NYSEArca: RSX) is up just slightly over the past month, but the largest Russia exchange traded fund is higher by nearly 25% year-to-date, making it one of the best-performing, non-leveraged, single-country emerging markets ETFs.
Analysts and market observers are increasingly bullish on Russia’s prospects as oil prices rebound and the country inches toward an economic recovery.
With the oil factor in mind and the energy sectors overweight position in ETFs like RSX and the iShares MSCI Russia Capped Index Fund (NYSEArca: ERUS), it might be logical to think that the more oil prices rally, the more investors would favor Russian stocks. However, Russia is one of the more volatile emerging markets so some investors might need some extra prodding to get involved with ETFs such as ERUS and RSX.
“J.P. Morgan upgraded Russia to overweight from neutral in its bullish emerging market outlook report released Tuesday, writing that ‘a potentially higher oil price range is the catalyst for upgrading Russia,’” reports Dimitra DeFotis for Barron’s.
Onlookers 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. Russia’s GDP is expected to contract again this year, extending what is becoming a lengthy recession.
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Investors could also be lured back to RSX and Russian stocks due to some of the emerging world’s cheapest valuations. RSX is home to some of the emerging world’s least expensive stocks. The largest Russia ETF trading in the ETF allocates over 37% of its weight to energy stocks, by far its biggest sector weight.
“Valuations in Russia are, as usual, cheap. As the world continues to search for yield, Russia’s 5.1% 2017E dividend yield (IBES) is the highest of any major EM and nearly twice EM’s average of 2.8%. Finance Minister Siluanov has also talked about pushing for higher dividends from state-owned companies,” according to the J.P. Morgan note posted by Barron’s.
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Russian stocks recently got a lift after President Vladimir Putin said Russia, the world’s largest energy exporter, is ready to join OPEC in limiting oil production with either a freeze or a cut, Bloomberg reports. Looking ahead, Putin hoped OPEC would agree in November to limit crude oil production and promised Russia was ready to back such a decision. Russia is the largest non-OPEC producer in the world.
“Valuations remain undemanding in the energy sector. Aside from the trailing 5%+ dividend yield, the sector is pricing in $45 per barrel Brent versus the current price of $50,” adds J.P. Morgan.