Tag Archives: russian

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.

3 Mutual Funds To Defy 4-Week Outflows In The U.S.

Cash draining out from the pocket is always hard to accept. On that note, spare a thought for the U.S. stock and taxable-bond mutual funds that have witnessed outflows for four consecutive weeks. For the week ended Dec 2, U.S. stock and taxable-bond mutual funds saw outflows of $6.6 billion, according to Lipper data. Amid this, the 1-month category return of funds is equally dismal. While the U.S. stock and taxable-bond mutual funds are witnessing continuous outflows, stock ETFs attracted $3.8 billion in the week ended Dec 2. Some may believe that this sector might be in for a Santa Claus rally. However, mutual fund investors need not lose heart. Some low-cost mutual funds, each carrying a favorable Zacks Mutual Fund Rank, have emerged out of the weakness over the past four weeks, and are expected to continue their uptrend. Before we pick these funds, let’s look at the recent fund flows and key events. What’s Taking the Cash Out? The outflows from the U.S. stock and taxable-bond mutual funds started from the week ending Nov 11. For that week itself, taxable bond funds in the U.S. saw outflows of $3.7 billion. This was the worst outflow of taxable bond funds from the week ended Sep 30. U.S. stock funds recorded $1 billion of outflows in the week ended Nov 11, reversing the five-week run of inflows. Since then, the rate hike expectations primarily caused investors to pull money out of these mutual funds. To add to the confusion about the direction of the Fed’s policy, geopolitical concerns and mixed economic data further kept the cash from flowing in. Investors hunted for clues on the Fed’s policy move throughout November. The markets remained hopeful that the U.S. central bank may finally embark on a rate hike in December. Backing this belief were multiple comments from key Fed officials and the FOMC minutes. Last Friday, a strong U.S. jobs report affirmed chances of the Fed raising rates in two weeks. Markets were also exposed to certain geopolitical concerns. Multiple terrorist attacks in Paris, heightened violence in the Middle East, news of the shooting down of a Russian fighter jet near the border of Syria and concerns about China’s economic situation dampened investor sentiment. The 1-Month Performance The broader markets struggled over the past one month. The Dow Jones Industrial Average lost 1.9% over the last 4 weeks, while the Standard & Poor’s 500 (.INX) and Nasdaq Composite Index are down 1.7% and 1%, respectively. Among the 12 S&P industry groups, only three have positive one-month return. While Consumer Staples (NYSEARCA: XLP ) leads with a one-month gain of 2.58%, Real Estate (NYSEARCA: XLRE ) is up 2.57%. Utilities (NYSEARCA: XLU ) scored a 0.8% gain. In comparison, the one-month losses are significantly higher. Energy (NYSEARCA: XLE ) slumped 10.8%, followed by a 2.5% loss in Financial Services (NYSEARCA: XLFS ). Coming to the mutual funds category performances, Equity Precious Metals currently leads the one-month gains and is up 3.1%. All the other sectors in the green have sub 2% gain. Here too, the one-month losses are sufficiently higher. Energy Limited Partnership and Equity Energy categories have lost 19.8% and 9.8%, respectively. Below we present the best and worst performing mutual fund categories over the past one month: 1-Month Fund Category Performance (as of Dec 8) Best Gainers 1-M Total Return Worst Performers 1-M Total Return Equity Precious Metals 3.11 Energy Limited Partnership -19.78 Long Government 1.81 Equity Energy -9.75 Foreign Small/Mid Growth 1.64 Natural Resources -6.96 Bear Market 1.64 Commodities Broad Basket -5.11 Japan Stock 1.56 Latin America Stock -4.56 Source: Morningstar 3 Funds Beating the 4-week Gloom Remember it is always not true that fund inflows or outflows will decide the performance of the funds. In certain cases, there is more arts than science. Fund flows may be just a fraction of a factor to help a fund’s uptrend. Inflows may not translate into gains for mutual funds. Investors do not necessarily have to buy funds that are seeing strong inflows and vice versa. However, amid the declining trend in broader markets, it is often tough for individual funds to outperform. So those managing gains even in a tough environment are worth the appreciation. Below we highlight 3 funds that have thrived, each from the best three performing fund categories, over the trailing 4 weeks. These funds carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or Zacks Mutual Fund Rank #2 (Buy). Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on its likely future success. Equity Precious Metals American Century Quantitative Equity Funds Global Gold Fund A (MUTF: ACGGX ) seeks total return that is consistent with investments in companies related to mining, processing, fabricating or distributing gold or other precious metals across the world. ACGGX has gained 5.8% over the past 4 weeks. ACGGX carries a Zacks Mutual Fund Rank #2. However, ACGGX has lost 21.2% and 22.6% over year to date and the last 1 year, respectively. Annual expense ratio of 0.92% is lower than the category average of 1.43%. Long Government Vanguard Long-Term Treasury Fund Inv (MUTF: VUSTX ) invests a major portion of its assets in long-term bonds whose interest and principal payments are backed by the full faith and credit of the U.S. government. At least 65% of VUSTX’s assets will always be invested in U.S. Treasury securities. VUSTX has gained 2.3% over the past 4 weeks. VUSTX carries a Zacks Mutual Fund Rank #1. However, VUSTX has lost 0.8% year to date and gained just 2.9% over the last 1 year, respectively. Annual expense ratio of 0.20% is lower than the category average of 0.62%. Foreign Small/Mid Growth Oberweis International Opportunities Fund (MUTF: OBIOX ) seeks to maximize capital gains over the long term. Most of its assets are invested in companies located outside the U.S. OBIOX has gained 2.9% over the past 4 weeks. OBIOX carries a Zacks Mutual Fund Rank #1. OBIOX has jumped 14.7% year to date and gained 13.8% over the last 1-year period. The 3- and 5-year annualized returns are respectively 20.1% and 14.7%. Annual expense ratio of 1.60% is higher than the category average of 1.53%. Original Post

Fight Global Warming With These ETFs

Establishing a terror-free world may be the foremost agenda at the international level now, but the global warming issue is equally heated. While so long it was presumed that global warming leads to climate change, causing rising sea levels, drought in one region and flood in other, the latest theory is that this monster can ” cause job losses, recessions and even a tumbling stock market”, according to economists. So, one can easily understand the urgency of controlling pollution and cooling down the globe. In that vein, global leaders assembled in Paris at the COP 21 meet – which is the 21st annual conference of parties – to chalk out an elaborate and comprehensive plan for lowering carbon emissions and moderating the warming of the planet. Efforts to arrest global warming have been constant across individual countries. Now, not only developed economies, but the emerging ones too are pushing themselves to attain this goal. China intends to build a pollution-free environment. As part of this mission, the president of China and U.S. president Barack Obama have recently struck a deal to lessen carbon emissions. The agreement calls for carbon emission reductions by 26% to 28% in the U.S. by 2025. It also includes the first-ever commitment by China to stop emissions from growing by 2030. Notably, China and America are two largest emitters of greenhouse gases . President Obama has always been active in the cause of cleaning up carbon pollution. A proposed Environmental Protection Agency rule seeks to reduce 30% carbon emission from power plants by 2030 from the levels emitted in 2005. At the conference, the Russian president noted that his country has not only averted the rise of greenhouse emissions, but has actually slowed it. Russia targets to curb 70% of greenhouse emissions by 2030 from the levels seen in 1990. At the Paris meet that is under way, global superpowers will also decide on supporting underprivileged countries like Bangladesh and Indonesia to finance the needed reforms they can’t pay for. Investors can also make outsized profits from this awareness on global warming. Several clean energy and low-carbon ETFs have been rolled out to capitalize on the growing need for environment protection and reduce greenhouse gas emissions. Below, we highlight a few ETF options that investors can go “green” with. SPDR MSCI ACWI Low Carbon Target ETF (NYSEARCA: LOWC ) This has become an $87.6 million ETF within just a year of its launch. The 1,277-stock ETF looks to track the stocks from developed and emerging markets that discharge lower carbons. The fund charges only 20 bps in fees. Here too, Apple (NASDAQ: AAPL ) (1.9%) takes the top spot, followed by Microsoft (NASDAQ: MSFT ) (1.17%) and General Electric (NYSE: GE ) (0.85%). The fund is heavy on the U.S., which has half of its total exposure, while Japan (7.9%) and the U.K. (7.1%) take the next two spots. LOWC is down about 0.9% so far this year (as of November 30, 2015). iShares MSCI ACWI Low Carbon Target ETF (NYSEARCA: CRBN ) The 931-stock fund also charges 20 bps in fees a year from investors. The fund has amassed over $217 million in assets since its debut in December 2014. Its exposure is quite similar to LOWC, as Apple (1.92%), Microsoft (1.17%) and General Electric (0.82%) are the top three holdings. The fund’s geographic exposure is also pretty much like that of LOWC. Etho Climate Leadership U.S. ETF (NYSEARCA: ETHO ) This new ETF has a 400-stock portfolio having a carbon emissions profile that is 50-70% lower per dollar invested than a conventional broad-based benchmark. The index studies total greenhouse gas emissions from over 5,000 equities to choose “climate leaders” in each industry. No stock accounts for more than 0.56% of the basket. Netflix (NASDAQ: NFLX ), M&T Bank Corp. (NYSE: MTB ) and Energy Recovery Inc. (NASDAQ: ERII ) are the top three holdings of the fund, which charges 75 bps in fees. Original Post