St. Basil's Cathedral, Moscow, Russia ()
In the past I have generally been against structuring trades around politics, as the nature of that game makes finding hard facts off which to base an investment almost impossible and the actions of politicians have a lot less influence on the economy than they would have you think.
In the Trump era, however, the ubiquity of political scandal and intrigue makes it hard to avoid. When it comes to the U.S. economy, I would still rather look at verifiable things such as data and earnings, but the American economy is big enough that the attitude and actions of a President can have massive economic impact on the economic conditions in other countries. Take Russia, for example.
There is no doubt that the degree of economic engagement between Russia and the U.S. matters a lot more for the former than the latter. The Russian economy continues to underperform based on the country’s assets and even a big reduction in trade between the two nations would barely cause a blip in the U.S. If U.S. investment into Russia were to be stopped, however, it would hit hard. Right now, though, that looks extremely unlikely.
However you look at it the Trump administration is taking it easy on Russia when it comes to economics. There are some sanctions in place, but as we saw last month, Trump is not going to stiffen them, even if many in his party and even some in his administration believe he should. Your understanding of why that is so depends on your politics and your view of Trump.
Either he is in some way beholden to Vladimir Putin or he understands the importance of a strong relationship with Russia and is reluctant to hit them where it hurts. Either way, the lack of action makes Russian stocks look cheap in a market where value is scarce.
As you can see, the iShares MSCI Russia Capped ETF (ERUS) has lost significant ground recently to bring it back close to the levels of a around a year ago. That is the result of an increased focus on Russia because of Putin’s support of Bashar al-Assad’s regime in Syria and the U.S. strikes against that regime in response to the use of chemical weapons in the ongoing civil war. That has increased the pressure on Trump to punish Russia for their support, but, as noted above, even under that pressure, nothing has happened.
You can view the politics of that however you wish, but with Europe and others increasingly isolating Russia, a maintenance of relations with the U.S. is vital for an economy that without the international action would probably be booming. In the past, higher oil prices have always boosted Russian stocks and we saw that to some extent earlier this year, but now, with oil trading close to multi-year highs, ERUS is at a level last seen when oil was around twenty bucks lower.
Four of the top six holdings of ERUS are energy companies, and the sector accounts for over forty-three percent of the fund in total. The underperformance of Russian stocks in general makes sense given the European actions, but sooner or later, the boost from oil prices this high will be felt. Call me cynical if you will, but as effective as trade embargos and other sanctions often are, they rarely seem to stop the flow of black gold when global demand is high. With the condemnation of Russia not being universal that looks likely to be the case here.
Investing in Russian stocks right now is a risky move for sure, but the sanctions related headlines are starting to fade, and this market has shown time and again recently that it is headline driven. Additionally, there is evidently very little chance of Donald Trump making more negative headlines by stepping up sanctions, so with oil at these levels, a recovery in ERUS looks on the cards and the risk looks to be worth taking.
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.
