Tag Archives: budget

Can South Africa ETF Sustain Its Recent Rally?

The South African equity market has been on a roller coaster ride this month recording big, wild moves both ways. The market took a deep plunge after South Africa’s president Jacob Zuma replaced finance minister Nhlanhla Nene, after less than two years of his appointment, with law maker David Van Rooyen (who is relatively unfamiliar and unproven) on December 9. Per reports, Nene’s efforts to cut back spending was not agreed upon in the parliament. This political upheaval dragged down the South African currency to an all-time low and punished the stocks and bonds. Following the removal of Nene, Zuma faced a series of outrages and protests and cries for Zuma’s resignation were widespread. To contain the slide in the market and soothe political uproar, South Africa’s president Jacob Zuma immediately intervened and named well-regarded Pravin Gordhan as the new finance minister who has vowed to restrain the budget deficit and total public debt, Reuters . Market Impact Given the constructive changes in the finance ministry, the South Africa ETF – the iShares MSCI South Africa ETF (NYSEARCA: EZA ) – added about 8.9% on December 14. The ETF lost over 5.8% in the last five days and is off 28.4% in the year-to-date time frame (as of the same date). The ETF also hit a 52-week low on December 11 when shares of EZA were down roughly 42% from their 52-week high price of $73.08/share. Can the Uptrend Last? The fund has been massively beaten down this year by a flurry of issues. The looming Fed lift-off has already soured investors’ mood towards this emerging market. Moreover, South Africa is a commodity-rich nation. Since the greenback is soaring on an impending rate hike, commodity prices are falling fast as most of these are priced in U.S. dollars since one can buy the same quantity of any commodity by a few dollars now. Credit agency Fitch already cut South Africa’s rating on December 4 to barely one mark above the junk status and also added that the firing of Nene “raised more negative than positive questions.” Charts Give Bearish Cues EZA has a Zacks ETF Rank #4 (Sell) with a High risk outlook. For a technical look, the short-term moving average (9-day SMA) for EZA is well below the long-term averages (both 50-Day SMA and 200-Day SMA) signaling further downward movement. Also, EZA is currently trading way below the parabolic SAR indicating a bearish trend for the product. However, the only ray of hope is that the Relative Strength Index (RSI) is around 33.67, suggesting that the ETF is on the verge of entering the oversold territory and is thus due for a trend reversal. Still, for investors who believe that the recent rise in EZA will likely continue for quite some time, we have detailed the ETF below. After all investors should note that much of the Fed-induced blows are currently priced in the present EM valuations. Though emerging market investments will be edgy in 2016, repeated comments made by the Fed on a slow hike trajectory might not hit the EM bloc as badly as is being feared. Also, the fund (EZA) has just 5.3% exposure in materials and 6.7% in the energy sector, and should not be deeply affected by the slumping commodity market. EZA in Focus This ETF looks to track the MSCI South Africa Index. It has a major focus on large and mid-cap equities. The ETF invests about $283.2 million assets in 56 holdings. EZA carries high company-specific concentration risk, with Naspers Limited N Ltd ( OTCPK:NPSNY ) (23.87%), Sasol Ltd (NYSE: SSL ) (6.51%) and MTN Group Ltd ( OTCPK:MTNOY ) (6.28%) taking the top three spots of the basket. From a sector point of view, the fund is tilted towards consumer discretionary (35.7%) and financials (28.9%). The fund charges 62 bps as fees. Original Post

The Market Vectors Russia ETF – Low Oil Is An Existential Threat, The Worst Is Yet To Come

Summary Low oil prices have important implications for Russian economy and RSX holdings. These implications go beyond the direct damage. I explain my views on this topic, as well as on the Central Bank’s policy and the ruble exchange rate. In my latest article titled ” RSX: Ready For December Wipeout ” on the Market Vectors Russia ETF (NYSE: RSX ), I discussed the recent developments including the weakness of oil and the relative strength of the Russian ruble. In this article, I will focus on the role of the ruble exchange rate for the economy, the Russian Central Bank’s policy and its implications for RSX. Why the ruble is so important? First, I would like to address the role of the Russian ruble exchange rate for the country’s economy. In my view, failure to acknowledge the governing role of the exchange rate for the Russian economy will lead to wrong assumptions and wrong conclusions about the state of the economy, the state of individual firms and, ultimately, the direction of RSX. One of the first comments on my preceding article stated that Russia, perhaps, was relying on champagne from France, and could live without it. This is very far from truth. For years, the Russian ruble suffered from the so-called Dutch disease – it was very strong. The combination of high oil prices and a strong ruble made production in Russia not viable in many cases. Why produce something, risk capital and wait for years for return on this capital when you can just buy what you need with the funds from energy and materials exports? This tactic was also politically convenient, as it brought immediate results that anyone can feel through increased consumption levels. However, there was a major flaw in the whole system that everyone knew but did not want to address. The whole system was (and still is) heavily dependent on just one variable – the price of oil. Back in 2009, Russia was lucky and oil rebounded fast. This time, luck is over. From the comments that I read here on SA I see that many people think that low oil prices just make life for the Russian economy harder through lower oil income. However, the damage spreads wider. Low oil prices are an existential threat to the current economic system, and it will take time to develop a real response to challenges. When people think about Russian imports, they typically imagine something like clothes, pork or the abovementioned champagne. Yes, these could be internally substituted. The price will be high, the quality will likely be so-so, but a substitute can be made. However, when we think about capital goods like tools and machines, the situation starts to look dire. Here’s a snapshot of top Russian imports. Source: www. worldrichestcountries.com As you can see, Russia imports things that are necessary to produce other things. This means that it will take long time before the country can internally source the means of production. Below is the graph of Russian industrial production this year. (click to enlarge) Source: tradingeconomics.com The devaluation of the ruble failed to improve situation on this front. Also, please note that quality is not included in such calculations. What do you think about the quality of internally produced tools and machines when the country chose the easy way and just bought them for 15 years in a row? The Central Bank’s dilemma This puts the Russian Central Bank in an unpleasant situation. If the ruble is too strong, the budget suffers. If the ruble becomes weaker, you immediately get inflation and producers cannot afford to buy the means of production – and you get negative industrial production growth numbers. So far, the Russian energy sector was immune from such problems. However, if oil prices stay at low levels for a longer time, the companies will have to invest in production or face production declines. Yes, I’m talking about production declines while Russia pumps record amounts of oil. This is a short-term reaction which was anticipated. In the longer run, if oil stays lower for longer, the absence of investment will inevitably lead to the decline in production. Recently, the Central Bank stated ( Google translate link ) that it was targeting lower inflation. It looks like it is doing so through keeping the ruble stronger in the short-term. As I’m writing this, the ruble-denominated price of oil is 2670, further down from 2693 that I mentioned in my previous article. I restate my view that this cannot last forever, as it hurts both the Russian budget and the majority of RSX holdings – energy and basic materials companies. When the next year starts, the Central Bank will face a tough choice between targeting inflation and filling the budget. My bet is that “filling the budget” will win, sending ruble and RSX lower. The longer oil stays around current levels, the lower RSX will fall. The Russian economy and Russian companies have previously shown that they were able to sustain low oil prices for a short period of time. This time is different, and the economy is facing a prolonged period of low oil prices. I believe that this is an existential threat to the current economic model. At the same time, I see no changes in policy that would have signaled a shift from the current economic model to something different. When I look at RSX chart, I believe that investors are too optimistic about Russian companies and Russian economy in general. As oil prices stay lower for longer, the numbers will show the continuing contraction and early optimists will likely run for cover. I remain bearish on RSX.

RSX: What Happened?

Summary RSX enjoys a rally while oil prices continue to fall. Political developments are the main reason for this. Fundamentally, Russia is under increased pressure due to falling oil. Earlier in October, I wrote an article discussing what worked and what did not work in my initial Market Vectors Russia ETF (NYSEARCA: RSX ) bear thesis. What interested me most was why RSX gained more support than I expected. I arrived to the conclusion that the combination of capital inflow and stronger ruble played a role in RSX’ relative strength. Nevertheless, I remained bearish on RSX. My bearish view on oil played a key role in this thesis. RSX’ top holdings Surgutneftegaz ( OTCPK:SGTPY ), LUKOIL ( OTC:LUKFY ), Tatneft ( OTCPK:OAOFY ) and Rosneft ( OTC:RNFTF ) are directly dependent on oil prices. Banks Sberbank ( OTCPK:SBRCY ) and VTB Bank are dependent on oil indirectly, as weaker oil leads to weaker Russian economy. Polyus Gold ( OTCPK:OPYGY ), Uralkali, Polymetal ( OTCPK:AUCOY ) get hurt by low commodity prices. This list can go on and on… However, as I’m writing this article, RSX gained 6.6% in two days, while oil prices remained under pressure – WTI is trading near $42 per barrel and Brent is trading below $44 per barrel. So, what happened? French tragedy boosted outlook for Russia G-20 leaders met after the horrific terrorist attacks in Paris. The sense of urgency made them turn to Russia, seeking to unite efforts on war with terrorism. The change of tone towards Russia was so dramatic that S&P even stated that new developments could help lift sanctions and boost Russia’s credit rating. In a separate event, Russia proposed Ukraine to pay off its $3 billion of debt by $1 billion per year starting from 2016. Russian also wanted U.S. and E.U. guarantees for Ukraine’s debt. If this deal is executed, it will effectively mean a new emission of Russia’s dollar-denominated debt. Currently, the country is cut from capital markets because of sanctions, so such a development will be a major breakthrough. Russia will become investable again. This was probably what went in the heads of fund managers when they looked at their exposure to Russia (there was little if any, I suppose). So, they just pushed the buy button regardless of oil prices. This is a bet that sanctions will be lifted by mid-2016, boosting the troubled economy. Is it sustainable? In the past few days, I’ve been thinking about whether my own perception of the Russian economy disturbs me from some “real picture”. Perhaps, all the bad news – poor economy, falling oil, various inefficiencies – are already priced in RSX and I’m just stubborn not to admit it. There is such a possibility. However, I don’t think the current rally will be sustainable unless oil prices actually rebound. The first reason for this is the Russian ruble – it became too strong in recent days. After a long and hard debate, Russian government approved the country’s budget for 2016. The main variable in the budget is the price of oil, which is denominated in rubles. The ruble-denominated price that Russia expects to get in 2016 is 3165. As I am writing this article, the ruble-denominated price of Brent oil is 2837 – way too low for the budget. As Russia’s reserve fund could run empty by 2016, according to the Ministry of Finance, the Central Bank may be forced to do something about the ruble if it stays strong. The only viable way is to cut the key rate, which stands at 11%. At the same time, the Fed might finally raise the rate, boosting the dollar and further hurting commodities. The combination of these two possible events will be detrimental to Russian securities. The recent enthusiasm in RSX may be short-lived as investors realize how much of a burden are low oil prices to both Russian oil producers and the economy in general. There’s most likely a long way before sanctions are lifted, and please remember this is politics – you can smile and say one thing and do the opposite. I think there are fundamental reasons to be very concerned about the Russian economy. However, in the light of recent events, anyone interested in shorting RSX should proceed with caution. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.