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RSX – November Review: The Share Price Driven By Geopolitical Factors

Summary RSX share price declined by 0.12% in November. The geopolitical events had a significant impact on price development of Russian shares in November. The relations between Russia and the EU have improved after the Paris terrorist attacks, the sanctions may be canceled soon. The Market Vectors Russia ETF (NYSEARCA: RSX ) experienced a rollercoaster ride in November. After gaining more than 5% in the first days of November, it started to decline steeply, as the falling commodity prices weighed on Russian companies. After the Paris terrorist attacks on November 13, the Russian share market started to grow, as the relations between Russia and the western countries started to warm up and the idea of a soon end to the anti-Russian sanctions came back to life. RSX was up by 5% month-to-date, when Turkey shot down Russian plane in Syria, on November 24. Turkey is a NATO member and the fears of the consequences of this attack pushed RSX back down and it finished the month almost flat. Sberbank ( OTCPK:SBRCY ) is still the biggest holding of RSX. It represents more than 9% of the portfolio. The weight of Lukoil ( OTCPK:LUKOY ) is more than 8% and weights of Gazprom ( OTCPK:OGZPY ) and Magnit are over 7%. Weights of all of the 4 biggest holdings increased compared to October. Shares of Severstal don’t belong among the top 15 RSX holdings anymore. The steelmaker was replaced by Mail.Ru Group ( OTC:MLRUY ). The 15 biggest holdings represent 77.97% of RSX portfolio. Source: own processing, using data of Vaneck.com Out of the 15 biggest RSX holdings, the biggest gains were recorded by shares of Mail.Ru Group in November. Shares of the e-mail service and interactive entertainment provider jumped by almost 18%. Investors appreciated the acquisition of the map applications maker Maps.Me. Shares of Sberbank , the biggest Russian bank, climbed by more than 9%. The share price was boosted by the information that in October, Sberbank recorded the best monthly financial results since September 2014. The biggest losses were recorded by London listed shares of Surgutneftegas ( OTCPK:SGTPY ) and by the major nickel and palladium producer Norilsk Nickel ( OTCPK:NILSY ). Both of the companies lost almost 9% of value. Source: own processing, using data of Bloomberg The correlation between RSX and oil prices (represented by the United States Oil ETF (NYSEARCA: USO )) changed rapidly in the second half of November, as the political factors started to set the direction of the Russian share prices development. The correlation between RSX and USO touched the -0.6 level at one point, which is a relatively high level of negative correlation. On the other hand the correlation between RSX and S&P 500 remained relatively high for the better part of November. Source: on processing, using data of Yahoo Finance Regarding the volatility, November was one of the calmest months of 2015. The 10-day moving coefficient of variation was moving in the 1.75% – 3.75% level. In the end of the month, it declined back to the 2% level. Source: on processing, using data of Yahoo Finance Some of the more interesting news: Lukoil announced its Q3 2015 financial results. It recorded earnings of $614 million (62% lower compared to Q3 2014), income from operating activities of $1.272 billion (decline by 56% y-o-y) and revenues of $23.418 billion (decline by 40% y-o-y). Sberbank reported that it recorded net income of RUB33.9 billion in October ($510 million) which is its best monthly result since September 2014. Net profit for the first 10 months of 2015 totaled RUB178.3 billion ($2.68 billion). Mail.Ru Group acquired Maps.Me, maker of map applications. Mail.Ru intends to integrate Maps.Me into its my.com platform. The my.com platform was launched in order to expand on the non-Russian markets. Maps.Me should help my.com to expand especially to the USA and to Germany. Yandex (NASDAQ: YNDX ) launched a weather forecasting service based on machine learning technology (Meteum). Meteum should calculate a new weather forecast every time a user consults the service. It should be able to provide weather forecasts on a hyper-local basis (according to the company, forecasts for particular city parts or even for particular buildings will be available). Meteum should be able to keep on improving the accuracy of its predictions as it will compare its forecasts with the actual weather conditions. Polymetal ( OTC:POYYF ) announced very good results of the Kyzyl Gold Project feasibility study. The mine should produce 325,000 toz gold per year over the 10 years of open pit mine operations. After the open pit operations, 12 years of underground mining will follow (270,000 toz gold per year. The average AISC is expected at $630/toz and the initial capex is estimated at $328 million. The after-tax IRR is 27% and NPV (10%) is $538 million at gold price of $1,200/toz. Russian GDP declined by 4.1% y-o-y in Q3 2015. It is an improvement compared to the Q2 decline by 4.6% y-o-y. The 2015 inflation rate will probably increase to 12.8% which is slightly more than the previous estimate of 12.2%. Conclusion After the Paris terrorist attacks, the relations between the EU and Russia started to improve quickly, as some of the European leaders finally realized that Russia is the most important ally in the war with ISIS. The Russian share market reacted by a swift growth, as the likelihood of a soon end to the anti-Russian sanctions has increased. Although the Turkish attack on the Russian plane pushed RSX lower, the Russian reaction on the incident has been relatively mild and the fears of a wider Russia-Turkey or even Russia-NATO conflict turned out to be significantly overblown. Moreover the oil price seems to have a significant support at the $40 level. If it rebounds and starts to move closer to $50, RSX may record some decent gains in December. 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.

A Look At RSX Through The Prism Of Recent Events

Turkey shot down a Russian plane on the Syrian border. RSX was sold on the news. Does this enforce the bear thesis? The Market Vectors Russia ETF (NYSE: RSX ) has found itself under pressure when Turkey shot down a Russian jet on the Syrian border. Russia is not expected to take this matter lightly, as one of the two pilots was shot to death from the ground, and one of the marines who took part in the rescue mission also died. However, despite the fact that I have argued for an RSX bear thesis multiple times, I think this tragic incident will have limited consequences for the fund. Russia has multiple economic ties with Turkey, which increased after Russia became subject to sanctions after the developments in Ukraine. Russia exports gas to Turkey, and is also building the latter’s first nuclear plant. Last year, more than 4 million of Russian tourists went to Turkey for their holidays. In turn, Turkey supplies Russia with textile production and, increasingly, with food, including fruits and some meat. I won’t discuss any political ways of the supposed “Russian vengeance”, and will focus on the possible economic consequences of Russia’s actions for RSX. In my view, the only possible way to economically respond to Turkey’s actions without shooting itself in the leg is to ban the sale of vacation tours to Turkey. I see no way how both countries will end their energetic relationships without major damage to both sides. In fact, this touring ban has already come into being. The Russian Federal Agency for Tourism has already recommended that selling tour packages for Turkey be stopped. There is a possibility that the ban will last for a long time, as the Russian government has previously used any available chance to redirect Russian tourists from abroad to Crimea. Crimea lacks the necessary infrastructure and a culture of service following decades of underinvestment and, in my view, is uncompetitive compared to Turkey. Given all the recent problems that have hurt Crimea’s economics, there will be a massive incentive to help the disputed peninsula by redirecting tourists from Turkey to Crimea. This is pure speculation, of course, but I expect this to be implemented in reality. In this case, the damage will be limited to the economy of Turkey, which is beyond the scope of the current article, and the plans of Russian tourists, who have got accustomed to a certain level of service and will have to either decrease their appetites or put more money on the table. As for the fund’s holdings , I see no significant threats. The energy part of RSX could only benefit if increased tensions in the region finally lead to higher oil prices. I don’t think this will be the case, but the possibility of such an outcome certainly exists. Sberbank (OTCPK: OTCPK:SBRCY ) and Yandex (NASDAQ: YNDX ) have a presence in Turkey, but there are no signs that they will be harmed unless there is a very serious exchange of sanctions between the two countries. RSX fell on the news, but I think that it was just emotional overreaction. I remain concerned about the price of oil, the state of the Russian economy and the overvaluation of the Russian ruble, but I do not think this incident is a meaningful contribution to the bear thesis.

Russia: Surprise BRIC ETF Winner So Far This Year

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 wreaked 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 (NYSEARCA: 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. 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 (NYSEARCA: 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. 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. 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 (NYSEARCA: EWZ ), India (BATS: INDA ) and China (NYSEARCA: 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 year-end 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 (NYSEARCA: ERUS ), and SPDR S&P Russia ETF (NYSEARCA: 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. Original Post