Credit: Shutterstock photo2014 has been a catastrophic one for Russian equities thanks to the ban imposed on the nation by the West following its Crimea (erstwhile Ukrainian territory) annexation in the first half. The massive oil price crash in the second half also spurred many investors to abandon the country's equities in apprehension of significant economic losses. As a result, Russian stocks almost halved in price last year (read: Russia ETFs Crash: What Went Wrong in 2014? ).
However, things have changed in 2015. Like many other countries across the globe, Russia also entered into a cycle of rate cut in 2015 having slashed the key rate for the third time so far this year to ward off an impending recession. An upward movement in the local currency and cooling inflation has made this possible, per Bloomberg .
In late April, Moscow reduced the key one-week interest rate to 12.5% from 14% and hinted at further easing if required. Notably, Russia generates about 50% of its revenues from oil and natural gas resources. So, this oil-dependent economy was crushed by the crude carnage last year. The Russian currency, the ruble, lost about 50% against the greenback in the second half of 2014 and stoked inflation.
To contain this oil-induced plunge, in December, the Russian central bank resorted to the boldest move of raising the key rate from 10.5% to 17%, which was the steepest one-time hike in 16 years (read: Can Russia ETFs Stabilize After Ruble Intervention? ) .
However, the recent recovery in crude prices has shored up the Russian currency. The ruble has gained over 13% against the greenback since the start of this year and put a lid on soaring inflation. Monthly inflation cooled down for the second successive month in March to its lowest level since October 2014 (read: Big Oil Beats Q1 Earnings: Energy ETFs in Focus ).
Bloomberg noted that inflation rate is likely to have slowed to 16.5% as of April 27 from 16.9% recorded in March. The Russian central bank is optimistic of a 'faster-than-expected' decline in inflation in coming months and expects the same to halve to 8% in April 2016. The central bank targets 4% inflation rate in 2017.
The Russian economy ministry said (in late April) that it expects GDP to shrink 2.8% in 2015, narrower than the previous projection of a 3% decline. GDP might rebound to 2.3% in 2016, as indicated by the Bloomberg article.
Several market participants believe that the latest cuts are nothing but the roll-back of the sharp 650-bps urgent rate hike made in December 2014. The latest cuts are hardly any fresh moves. Whatever the case, Russian equities ETFs are presently on a roll.
Market Vectors Russia ETF ( RSX ) ,iShares MSCI Russia Capped ETF ( ERUS ) and SPDR S&P Russia ETF ( RBL ) have all returned over 30% year to date (as of May 4, 2015). Yet another Russian ETF based on small-cap stocks - Market Vectors Russia Small-Cap ETF ( RSXJ ) - is up about 25% so far this year. Apart from the above-said reasons, cheaper valuation and truce talks with Ukraine have also helped Russia ETFs to find a footing (read: Should You Try Bottom Fishing in Russia ETFs on Rate Cut? ).
Bottom Line
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 highly vulnerable to the Fed's interest rate policy. The U.S. central bank will likely hike its key rate sometime this year putting many emerging markets including Russia at risk.
Oil prices are still to swing back to their past glory. So, ample downside risks stay hidden in this investment. RSX, ERUS and RBL have a Zacks ETF Rank #4 (Sell) with a High risk outlook while RSXJ carries a Zacks ETF Rank #5 (Strong Sell) with a Medium risk outlook.
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 >>
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
MKT VEC-RUSSIA (RSX): ETF Research Reports
ISHARS-MS RUSSA (ERUS): ETF Research Reports
MKT-VEC RUS SC (RSXJ): ETF Research Reports
SPDR-SP RUSSIA (RBL): ETF Research Reports
To read this article on Zacks.com click here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
