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RSX: August Review

Summary RSX experienced huge volatility in August, but its share price finished the month only 0.88% lower. Russian GDP decline was bigger than expected and the situation in Ukraine started to deteriorate again. The main catalyst that should be able to push RSX price higher is oil price recovery. The Market Vectors Russia ETF (NYSEARCA: RSX ) declined by 0.88% in August. Although the 0.88% loss may indicated that August was a boring month, nothing is further from truth. Chinese economic woes initiated huge selloffs on global financial markets, Russian share market included. The share market panic was further strengthened by collapsing oil price that reached a new multi-year low at $37/barrel. On August 10, Russia announced that its GDP declined by 4.6% in Q2 2015. The decline was worse than estimated by analysts. The investors confidence was shaken also by news coming from Ukraine that indicated that the semi frozen conflict starts to heat up again. As a result, RSX was 15% lower compared to the July closing price at one moment. But as the situation on global financial markets calmed down and global share indices as well as oil price recovered slightly, RSX managed to erase most of its losses. The 4 biggest holdings in the portfolio of RSX are still shares of Magnit, Gazprom ( OTCPK:OGZPY ), Lukoil ( OTCPK:LUKOY ) and Sberbank ( OTCPK:SBRCY ). Weights of Magnit, Gazprom and Lukoil were over 7%, weight of Sberbank was slightly below 7%. On the 5th position, Norilsk Nickel ( OTCPK:NILSY ) replaced Novatek. The weight of Yandex (NASDAQ: YNDX ) keeps on declining, as shares of the company don’t perform well. If this trend continues, Yandex will slip out of the top 15 in the coming months. (click to enlarge) Source: own processing, using data of vaneck.com Out of the 15 biggest holdings, only 4 companies experienced share price growth in August. The biggest share price growth was experienced by Uralkali. Shares of the major potash producer were supported by its huge share buyback program. The biggest decline was recorded by shares of Yandex. Shares of the Russian search engine provider peaked at $21 in April. After 5 months of declines their current market price is less than $12. Source: own processing, using data of Bloomberg Although the recent months were hard for RSX, it is still up by almost 15% y-t-d. Among the 15 biggest holdings, Micex quoted shares of Surgutneftegas ( OTCPK:SGTPY ) did very well and they are up by almost 37%. Uralkali experienced a great August and as a result its share price is more than 30% up y-t-d. On the other hand shares of Yandex lost more than 1/3 of their value over the last 8 months. The second worst result was achieved by VTB Bank. VTB Bank share price lost almost 10% y-t-d. Source: own processing, using data of Bloomberg RSX remained to be very strongly correlated to the oil price (represented by The United States Oil ETF (NYSEARCA: USO ) in the chart below). The correlation between RSX and USO was stronger than correlation between RSX and S&P 500 for the better part of August. Given the important role that oil production plays in the Russian economy and given the strong position of energy companies in the RSX portfolio, it is hard to expect any meaningful and lasting change anytime soon. Source: own processing, using data of Yahoo Finance RSX share price went crazy in late August. The major share markets experienced a huge increase of volatility and the Russian share market was no exemption. The volatility measured by 10-day moving coefficient of variation was relatively stable from the middle of June to the middle of August. It was range-bounded in the 1%-3% interval. But in late August it increased rapidly and it crossed the 5% level for the third time over the last 8 months. (click to enlarge) Source: own processing, using data of Yahoo Finance Some of the more interesting news: The Russian companies were reporting H1 2015 and/or Q2 2015 financial results. Most of the important news were related to these reports in August. Gazprom announced its H1 2015 financial results. In H1 2015, Gazprom recorded net income of R568 billion which is 25% more compared to H1 2014. However in dollar terms, the income was only approximately $9 billion which is almost 30% lower compared to H1 2014. Norilsk Nickel surprised positively as its H1 2015 net profit remained almost unchanged compared to H1 2014, despite significantly weaker metals prices (nickel and copper prices were significantly lower compared to H1 2014). Norilsk Nickel recorded revenues of $4.9 billion (-14%), EBITDA of $2.7 billion (+8%), net earnings of $1.5 billion and adjusted earnings of $1.9 billion. Sberbank experienced a huge drop in profitability. It recorded net profit of R85.2 billion which is a 50% decline compared to H1 2014. In dollar terms, the decline is whopping 72%. The decline was caused by net provision charge for loan impairment that increased by R81.5 billion y-o-y. Total operating income before impairments remained almost unchanged. Rosneft signed LNG Supply and Purchase Agreement with state-owned Egyptian Natural Gas Company. According to the agreement, Rosneft will deliver LNG to Egypt. Rosneft has also reported its H1 2015 financial results. The company recorded revenues of $46.2 billion (-42.5%), EBITDA of $10.8 billion (-36.1%) and adjusted net income of $3.5 billion (-40.7%). Uralkali announced its intention to buy own shares and GDRs worth $1.32 billion. The company plans to purchase up to 411,042,224 common shares (1 GDR represents 5 common shares), representing 14% of company’s issued and outstanding shares. The purchase price will be $3.2 per share or $16 per GDR. Magnitogorsk Iron and Steel Works , one of the biggest Russian steelmakers, signed an agreement with Yandex Data Factory, an analytical subsidiary of Yandex, to develop a mathematical model and related software for steel making. The aim of the cooperation is to optimize consumption of ferroalloys and other materials during the steel production. Conclusion August was a wild month for RSX share price and it is probable that September won’t be too much calmer. The developments in China, oil prices and FED’s decision whether to raise or not to raise interest rates will affect RSX significantly in September. It is important not to forget about the political risks. Situation in Ukraine seems to be deteriorating once again and there are also rumours that Russia is about to start a direct intervention in Syria to support the government forces in its war with the Islamic State. It is hard to predict whether RSX will grow or decline in September. The only sure thing is that it will be a volatile ride. 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. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

These Country ETFs Benefit From Oil Rebound

It’s truly been a roller-coaster ride for oil. The liquid commodity plunged to a six-and-a-half year low at the start of the week only to record the highest single-day gain in over six years to end the week. While pockets of weakness in most global superpowers including the Euro zone, China and Japan have resulted in weaker activities and weighed on crude oil prices so far, the recent rout in the Chinese market following its currency devaluation and grave economic situation slaughtered the already weak oil prices (read: 4 Ways to Short the Energy Sector with ETFs ). However, after a week-long losing streak, jittery investors worldwide saw some relief on Wednesday as China slashed rates to boost its economy and repeatedly intervened into the stock market to contain the relentless slide. Also, hunt for bargain took center stage. To add to this, the U.S. economy grew at 3.7% in Q2, which breezed past the initial reading of 2.3% growth and 0.6% expansion recorded in the seasonally weak Q1. A strong rebound in the U.S. economy, which is in fact the world’s largest economy, ruled out the demand-related fear out of the oil space. Plus, as per the American Petroleum Institute (API) crude stock piles declined by 7.3 million barrels in the week ending August 21,whcih is way lower than analysts’ projection of a rise of 1.9 million barrels in crude inventories. This overall bullish sentiment showered massive gains on oil prices on August 27 as oil advanced around 10%. Both WTI and Brent crude benefited from this unexpected surge. As a result, key oil producing and exporting countries that were on a downtrend so long, saw a sharp rise on Thursday trading. As we all know, ETFs offer a great opportunity while it comes to playing a particular nation. In light of this, we have highlighted a few country ETFs that could see a turnaround in the days ahead should oil price continue to rise ( see all energy ETFs here). Market Vectors Russia ETF (NYSEARCA: RSX ) Things have been pretty tough for Russia for last one-and-a-half year. If the tussle between Russia and the West on the Ukraine issue bothered the country, oil – seemingly the main commodity of the nation – posed further risks to its economy (read: 3 Russia ETFs at Bargain Prices Right Now ). RSX is the most popular and liquid option in the space with an asset base of $1.6 billion and average trading volume of more than 11 million shares a day. The fund tracks the Market Vectors Russia Index to provide exposure to the Russian equities. The energy sector accounts for about 43% of RSX with Gazprom and Lukoil – the Russian energy giants – taking more than 15% share of the fund. RSX charges 63 basis points as expenses. The fund was up 6.7% on August 27. iShares MSCI Malaysia Index Fund (NYSEARCA: EWM ) The Malaysian equity market has been also been a weak spot lately as its neighboring country China devalued its currency in mid August. Also, falling oil price hurt the stocks of the oil-rich Malaysia, which happens to be one of the largest Asian crude exporters. Political crisis is another cause of concern for Malaysia (read: 3 Country ETFs Impacted By China Currency Devaluation ). The $256 million-fund EWM looks to track the performance of the Malaysian equity market. EWM charges investors 48 basis points a year in fees and was up 5.2% on August 27 both on oil price recovery and the return of risk-on trade sentiment into the market. iShares MSCI UAE Capped ETF (NASDAQ: UAE ) Oil-rich OPEC nations (Organization of Petroleum Exporting Countries) must be the big beneficiary of this sudden surge in oil. UAE is such a country. The fund provides exposure to 32 stocks by tracking the MSCI All UAE Capped Index. The ETF has accumulated $27.5 million in AUM so far while charging investors 62 bps in annual fees. Volume is paltry trading in about 15,000 shares a day on average. The fund returned 5.5% on August 27. Another OPEC nation Qatar also got mileage out of this jump. Its pure play ETF, MSCI Qatar Capped ETF (NASDAQ: QAT ) soared 8.1% yesterday while yet another Middle East fund Market Vectors Gulf States Index ETF (NYSEARCA: MES ) added over 4.7%. iShares MSCI Canada ETF (NYSEARCA: EWC ) Canada is also among the world’s top 10 oil producers. The best way to invest in Canada is through iShares MSCI Canada ETF, a product that has nearly $1.88 billion in assets. The fund tracks the MSCI Canada Index, holding just under 100 stocks in its basket. Although financials takes the top spot at about 40%, energy makes up a huge chunk of assets accounting for about 20% of the total. The fund gained over 3.6% on August 27, 2015. EWC charges 48 bps in fees. Original Post

Shorting Russia Now Is Not As Rewarding As In 2014

Summary Oil prices have dropped sharply again, similar to late 2014, yet this has been less rewarding for investors shorting Russia. FDI in Russia is projected to increase from its current level of $1.3 billion to $16.2 billion during the 2nd quarter of 2016. The IMF made the following statement: “The recovery in 2016 will be supported by the ruble’s more competitive exchange rate, increasing external demand and normalization of domestic financial conditions.”. Non-alignment in sanctions against Russia is another factor that could decrease the value associated with shorting Russia, even in a low oil price environment. Shorting Russia will not be as rewarding as late 2014. Since late 2014 I have been bullish and bearish on Russia, enjoying the thrill of the volatility of the Direxion Daily Russia Bear 3x ETF(NYSEARCA: RUSS ) and the Direxion Daily Russia Bull 3x ETF(NYSEARCA: RUSL ). With necessary and intensive due diligence and an appetite for risk, the past year has provided opportunity for substantial returns by strategically investing in these leveraged ETFs. The declining price of oil has presented an obvious opportunity to short Russia, although the recent return for investors has been significantly lower. Although sentiment towards Russia has become more bearish amidst low oil prices, I have decided to take a step back and sell the majority of my position in RUSS, only keep the profit invested. This was tough to do, as Citi has projected that oil may drop close to $30/barrel this year , producing an inevitable shock to Russia’s economy. My basis for this decision was a historical analysis of the impact of oil prices on the Direxion Daily Russia Bear 3X ETF. The plunging price of oil in late 2014 sent the Direxion Daily Russia Bear ETF near 200.00 in December of 2014. Now that oil has dropped to its 6.5 year low , the positive impact on the Direxion Daily Russia Bear 3X ETF has been drastically reduced. The fund currently trades at 44.59, a far cry from the high levels experienced earlier this year. RUSS data by YCharts Lower oil prices have been less rewarding for bears Oil prices have dropped sharply again, similar to late 2014, yet this has been less rewarding for investors shorting Russia. (click to enlarge) Source: Trading Economics It will certainly take $30/barrel oil for investors shorting Russia to receive a substantial return, similar to what investors who shorted Russia in late 2014 experienced. I do not deny the opportunity associated with continuing to short Russia in anticipation of lower oil prices, but still decided to step back and take a wait and see attitude, which will most likely result in me not shorting Russia again. Sanctions: Non-Alignment Non-alignment in sanctions against Russia is another factor that could decrease the value associated with shorting Russia, even in a low oil price environment. However, the effects of sanctions have thus far been substantial, as the IMF has projected that sanctions have resulted in Russia’s economy contracting at an additional 1 to 1.5%. In December of 2014, China’s foreign minister Wang Yi made the following statements edifying its non alignment with sanctions against Russia: “Russia has the capability and the wisdom to overcome the existing hardship in the economic situation. If the Russian side needs, we will provide necessary assistance within our capacity.” These supporting views of Russia are also shared by its counterparts Brazil, India, and South Africa. Economic Outlook (click to enlarge) Source: Trading Economics The recent contraction in annual GDP growth will be met with reconciliation, according to the following outlook of the IMF: Growth in Russia’s GDP is projected to contract by 3.6% in 2015, but is expected to recover in 2016. Weak GDP growth of 1.5% is expected. This statement sums up the IMF’s reasoning for the recovery of Russia’s economy. “The recovery in 2016 will be supported by the ruble’s more competitive exchange rate, increasing external demand and normalization of domestic financial conditions.” Increased FDI Inflow Projections My observation of the increased FDI projections for Russia was probably the strongest indicator for me to determine that shorting Russia was no longer as beneficial. (click to enlarge) Source: Trading Economics The projected increased flow of FDI into Russia verifies that the country now has increased investors confidence, unlike late 2014. Trading Economics projects a substantial increase in FDI during the next 12 months. FDI is projected to increase from its current level of $1.3 billion to $16.2 billion during the 2nd quarter of 2016. 3rd quarter of 2015: 167% QoQ growth in FDI projected. 4th quarter of 2015: 14.3% QoQ growth in FDI projected. 1st quarter of 2016: 231.9% QoQ growth in FDI projected. 2nd quarter of 2016: 22.3% QoQ growth in FDI projected. Valuation Case A glance at some Russian ADRS displays how many companies in Russia have been unfairly hurt by sanctions and low oil prices, making them extremely undervalued. I will be watching these companies, based on an initial glance at valuation, although I will need to wait until oil prices settle and the economy of Russia begins to experience moderate economic growth, before feeling confident value investing in Russia. Company P/E P/B Mobile Telesystems Public JSC(NYSE: MBT ) 4.63 1.39 Qiwi plc(NASDAQ: QIWI ) 7.2 4.06 JSC Irkutskenergo(OTCPK: IKSGY ) 6.78 0.51 Federal Hydro-Generating Company(OTCQX: RSHYY ) 3.77 0.14 Rostelecom(OTCQX: ROSYY ) 2.59 0.32 Conclusion Shorting Russia could be rewarding, but I have decided to sell my principal investment, only keeping the profits invested in the Direxion Russia Daily Bear 3X ETF; this is based on the consensus that oil should drop to $30/barrel, and that this provides further opportunity for profit. This decision is not based on my long term bearish view of Russia, but rather the inevitable and sensationalized effect that lower oil prices will have on Russia’s economy. However, I think that the days of shorting Russia and winning will soon be over. Besides, I prefer the simplicity of value investing in high growth countries in Southeast Asia, and do not wish to relegate the art of investing to gambling. Russia is a complicated case for investment, but based on my observation, I am not confident that shorting Russia is a wise endeavor, even though oil prices are sure to be lower in the future. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.