Russia has hardly raised a toast to its economy in nearly two years thanks to the ban imposed on the nation by the West following its Crimea (erstwhile Ukrainian territory). Plus, the acute and persistent crash in oil prices in the second half has wrecked havoc on Russian stocks and ETFs in the last one and a half years.
Apprehensions of significant economic losses and a five-year low GDP growth in 2014 led investors to excuse themselves from Russia. As a result, the biggest Russia ETF Market Vectors Russia ETF (RSX) lost 42.3% in the last two years and 20.7% in the last one year (as of November 2, 2015).
The economy has hardly shown any sign of a meaningful turnaround with its GDP shrinking 4.3% year over year in Q3. Its economy is also predicted to be contracting 3.3% in 2015. Yet RSX has managed 16.5% gains so far this year on the back of its dirt cheap valuation (read: Russia ETFs Making a Strong Comeback).
If this was not enough, following the October Fed meeting, which once again sparked off the December rate hike talks, gave this Russia ETF a boost to emerge as a winner in the BRIC ETFs pack, per barrons.com.
Needless to mention, emerging market investing is always threatened by Fed policy tightening as it might lead to a cease in cheap dollar inflows. But Russia ETFs have defied this norm this time while the other pillars – Brazil, India and China – followed.
Below we highlight the last five-day performance of BRIC ETFs, which shows that RSX and small-cap Russia ETF Market Vectors Russia Small-Cap ETF (RSXJ) were up 0.9% and 1.5%, respectively, while large-cap India ETF INDA and the China ETF MCHI lost about 2.9% and 2.3% and Brazil ETF EWZ added 0.6%.
What’s Behind This Optimism?
The main driver was the central bank meeting held at October end, wherein
Russia's central bank maintained its key interest rate, but hinted at rate cuts in the coming months as inflation is showing signs of abating, though slightly at the current level.
As per Bank of
Russia, the annual pace of inflation is projected under 7% for October 2016 and at 4% for 2017. The bank indicated that the reasonably tight monetary policy and soft domestic demand due to reduced expansion in the nominal income of the population will curb inflation.
Along with this, the backing off of tanks and weapons by government troops and separatists in eastern Ukraine strengthened the bet over a stable truce. This should in turn lessen international sanctions against
Russia, per Bloomberg.
Also, the oil price recovery in early October (as
Russia is a major oil-exporting nation) and weakness in the greenback last month lent this woe-begotten economy and its currency and stocks a nice bounce. Ruble gained over 23% as of November 2, 2015 from this year’s low hit in May (read: These Country ETFs Benefit from Oil Rebound).
Best Performance in BRICS
While
Russia ETFs are roaring back on speculations of sooner-than-expected rate cuts, Chinese ETFs have seen a tumultuous year on slowing economic growth and overvaluation concerns. India ETFs also haven’t been able to live up to investors’ expectations as pro-growth reforms are taking time to turn into reality (read: Correction Seems Over: Time for China ETFs?).
And Brazil has its long-standing economic issues of slowing growth and rising inflation. Economists predict that Brazil's economy will shrink 3.02% in 2015 and 1.43% in 2016. Brazil is nearing the worst economic debacle in 25 years. So far this year (as of November 2, 2015), ETFs on other BRIC nations – Brazil (EWZ), India (INDA) and China (MCHI) – are down 36%, 4.3% and 4.9%, respectively while
Russia (RSX) is up 16.5%.
Thus, investors might consider betting on the Russian equities ETF space on this nice price surprise. As a caveat, they should note that the economy is still soft and might be vulnerable to the Fed’s interest rate policy. The U.S. central bank will likely hike its key rate by this yearend or early next year putting many emerging markets including
Russia, at risk.
Oil prices are still to regain the lost ground. So, ample downside risks stay hidden in this investment. RSX,
iShares MSCI Russia Capped ETF (
ERUS),
SPDR S&P Russia ETF (
RBL), ERUS and RBL have a Zacks ETF Rank #4 (Sell) each with a High risk outlook while RSXJ carries a Zacks ETF Rank #5 (Strong Sell) with a High risk outlook.
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Click to get this free report MKT VEC-RUSSIA (RSX): ETF Research Reports MKT-VEC RUS SC (RSXJ): ETF Research Reports ISHARS-MS RUSSA (ERUS): ETF Research Reports SPDR-SP RUSSIA (RBL): ETF Research Reports ISHARS-M INDIA (INDA): ETF Research Reports ISHARS-BRAZIL (EWZ): ETF Research Reports ISHARS-MS CH IF (MCHI): ETF Research Reports To read this article on Zacks.com click here. Zacks Investment Research Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report