A combination of rising oil prices, a rebounding currency and U.S. politics were among the catalyst that made the VanEck Vectors Russia ETF (NYSEArca: RSX) and other Russia exchange traded funds among last year’s best-performing emerging markets equity assets.
Some market observers believe RSX and Russian equities have the wind at their backs in 2017 and not all of that has to do with the newly inaugurated U.S. president. Oil prices have rallied as growing economies devour raw materials to fuel their growth and recent plans to cut production from the oil cartel, the Organization of Petroleum Exporting Countries, along with other non-OPEC members.
Alternatives to RSX, the largest Russia ETF trading in the U.S., include the iShares MSCI Russia Capped ETF (NYSEArca: ERUS), SPDR S&P Russia ETF (NYSEArca: RBL) and the VanEck Vectors Russia Small-Cap ETF (NYSEArca: RSXJ).
“…our preference is for domestic exposure, with the rouble well supported, real wages having turned positive, and a further 200 basis points of rate cuts likely to come in 2017, which in turn should feed through to a rebound in consumption as pent-up demand is unleashed. Any market that is up 70% YoY in dollar terms will be vulnerable to bouts of profit-taking, and we suspect Russia is no exception, particularly if markets roll over post Donald Trump’s inauguration. It goes without saying that we are no longer in the early stages of the rally,” according to a Renaissance Capital note posted by Dimitra DeFotis of Barron’s.
RSXJ, the Russia small-cap ETF, has a fair amount of exposure to the domestic economy as utilities, consumer staples and real estate stocks combine for almost 42% of that ETF’s lineup. As is usually the case, Russian stocks are attractively valued relative to broader emerging markets benchmarks.
Earlier this month, the VanEck team pointed out that despite the recent jump in Russia’s markets, Russian stocks remain relatively attractive. Specifically, RSX is trading at a 7.83 price-to-earnings ratio and a 0.76 price-to-book
“In an uncertain world of Brexit, Trump, Italian, French and German elections we find Russia well placed within emerging markets. Provided [the price of]oil holds at current levels, we see Russia’s economic rebound in 2017 as well secured, with the potential for growth to exceed consensus forecasts … We see Russia as resilient to Fed rate hikes given the current account surplus and given the challenges Russian companies have had in accessing international funding over the past three years,” according to the Renaissance note seen in Barron’s.