ETF Exchange Traded Funds
December 17, 2014 - Russian ETF's Crashing
Russia ETFs Crash: What Went Wrong in 2014? by Zacks Investment Research
2014 has been disastrous 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 of the year. The massive oil crash in the second half also compelled many investors to flee the country’s equities in apprehension of significant economic losses.
Apparently, investors’ fears were not without reason, as the Russian finance minister indicated in November that the nation would lose about $140 billion in income due to a host of Western sanctions and the oil price collapse, with the latter making up the majority ($90–$100 billion) of losses.
Notably, Russia is one of the top producers of crude oil in the world and generates about 50% of its revenues from oil and natural gas resources. As much as one-fourth of the nation’s GDP relies on the energy sector, as noted by Bloomberg.
Given these deterrents, the Russian currency, the ruble, has lost about 50% against the greenback since June. The slide became more prominent from September when the oil rout started to take a bite out of it. In just three and half months, the currency has retreated about 35%. Needless to say, a plunging currency stoked inflation which was at a more-than-three-year high of 9.1% in November.
While measures like direct currency intervention, several minor rate hikes and tightening supplies of the ruble to put off domestic investors from betting against the currency did not come to fruition, the Russian central bank resorted to the boldest move of raising the key rate from 10.5% to 17% on December 16, representing the steepest one-time hike in 16 years.
As expected, the step came as a brief relief to ruble. Following the rate hike, one-month ruble forwards advanced 1.6% in Asian trading, as per Bloomberg. However, the rate hike did little to stem the losses later in the day, pushing the ruble to trade at roughly 70 against the dollar, marking a fresh all-time low.
A nation often tackles inflation and currency concerns with a rate hike, but at the price of its growth profile. Investors should note that Moscow has raised its key rate six times this year, and if the recent reaction to the hike was any guide, more rate hikes might be necessary.
Notably, Russia’s growth fell to 1.3% in 2013, the slowest pace since a contraction in 2009. Russian GDP shrank 0.3% quarter on quarter (q/q) in Q1, advanced a meager 0.14% q/q in Q2 only to halt q/q in Q3. With investments shrinking rapidly and oil prices falling fast with a few analysts projecting as bad as $30–$40/barrel price, there is every reason for investors to be concerned about Russia.
The Russian central bank lately raised apprehension about an economic contraction of 4.5-4.7% next year, the most severe since 2009, if oil looms around $60 a barrel. Notably, the price of Brent crude – Russia’s production type – hovered around $62/bbl on December 15.
Moreover, Russian stocks are losing their appeal as dividend paying stars too. According to a Bloomberg article issued in July, Russia’s state-owned companies like OAO Gazprom and OAO Rosneftegaz slashed payouts, resulting in about $18 billion less in expected dividend revenues for the government in 2016.
Russian ETFs literally have bled so far this year having lost about 45% each. On December 15 itself, Russian ETFs were off in the range of 10% on speculation of a full-blown currency crisis. The biggest Russian ETF Market Vectors Russia ETF (RSX) is down 45% so far this year and has lost 11.8% on December 15. Another ETF – iShares MSCI Russia Capped Index (ERUS) – also performed like RSX with a year-to-date loss of 45% and Monday’s loss of 11.4%.
Yet another Russian ETF based on small-cap stocks, Market Vectors Russia Small-Cap ETF (RSXJ) saw its price being halved this year and was down 5.4% on December 15. This new spate of bad news in the form of a rate hike might lead all Russian ETFs to trade in red in the coming days.
Another fund to watch is the SPDR S&P Russia ETF (RBL), which is off 45% so far this year. This will likely face the same issues as its counterparts, and it has close to 50% of its assets in the energy sector.
Notably, all these funds presently carry a Zacks ETF Rank #5 (Strong Sell), suggesting that more pain is in store, and that these might continue to underperform in the months to come and to kick-off 2015 as well.
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