Tag Archives: ukraine

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

RSX – October Review: First Positive Month After 5 Months Of Declines

Summary RSX grew by 6.4% in October, after 5 consecutive months of losses. The Bank of Russia expects that the inflation rate should decline by half by late 2016. If the prediction of lower inflation is correct, the Bank of Russia will start to cut the interest rates notably. The October Russian share market optimism may evaporate rather quickly if it won’t be supported by a positive oil price development. After five consecutive months of losses, share price of the Market Vectors Russia ETF (NYSEARCA: RSX ) increased in October. During the first half of the month, RSX grew from $15.7 to $17.75. Although it declined to $16.71 during the second half of October, RSX finished the month up by 6.43%. The growth was fueled by slightly higher commodity prices in early October. Although oil and metals prices started to decline again in late October, the share market was supported by an improved economic outlook. The minister of economic development said that Russian GDP should decline by 3.9% in 2015 but it should grow by 0.7% next year. Russia still has trouble with a high level of inflation that stands at 15.7%. But the Bank of Russia expects that the inflation rate will start to decline steeply by early 2016. If this prediction turns out to be right, the Bank of Russia will keep on cutting the interest rates. These expectations helped to support the Ruble exchange rate as well as the Russian share market. Also the situation in Ukraine is calm, there are no major fights anymore. Some significant changes regarding RSX’s composition occurred in October. Sberbank ( OTCPK:SBRCY ) became the biggest holding when the steep growth of the share price lifted the weight of the biggest Russian bank to 8.16%. Also weights of Gazprom ( OTCPK:OGZPY ) and Lukoil ( OTCPK:LUKOY ) increased. Weight of the biggest Russian food retailer, Magnit, declined from 7.31% at the end of September to 6.59% at the end of October. The Top 15 holdings represent 75.34% of RSX’s portfolio. Source: own processing, using data from vaneck.com Russian shares did very well in October. The biggest winner is Yandex (NASDAQ: YNDX ). Shares of the biggest Russian search engine provider rocketed by 50%, as the Q3 results have beaten expectations, the company has increased its 2015 guidance, and it has become the default search engine for Windows 10 in Russia, Ukraine and Turkey. Shares of the two biggest Russian banks, Sberbank and VTB, grew by 24% and 9% respectively. On the other hand, shares of Magnit lost 4.71% of value, as the food retailer announced a decline of net income by 28% y-o-y. Source: own processing, using data from Bloomberg The chart below shows the 10-day moving correlations between RSX and oil prices represented by the United States Oil ETF (NYSEARCA: USO ) and between RSX and the S&P 500. During the first decade of October, RSX grew along with USO; however, after USO began to decline, it didn’t drag RSX down. Similarly, RSX didn’t react to the jump of oil prices in late October. As a result, the correlation between RSX and USO was relatively low during the second half of the month. The correlation between RSX and the S&P 500 was very high and stable from late August to the middle of October, but it has declined rapidly over the last two weeks. It means that as a result, RSX was moving in its own direction over the last decade of October, without taking into account the oil market or the global financial market developments. Source: own processing, using data from Yahoo Finance The volatility of RSX was relatively high during the first half of October, but it declined significantly in the middle of the month and the end of October was relatively calm. On the other hand, as shown by the chart below, the Russian share market is highly volatile and the volatility eruptions are relatively regular. Source: own processing, using data from Yahoo Finance Some of the more interesting news: Yandex reported better than expected Q3 2015 financial results and increased the 2015 guidance. Yandex also announced that it added an online video streaming service to its film and TV recommendation service. An important news came on October 13, when Yandex announced that its search engine will become the default homepage and search engine for Windows 10 in Russia, Ukraine, Turkey, Belarus, Kazakhstan and several other countries in the region. This strategic partnership may help Yandex in its fight with Google (NASDAQ: GOOG ) (NASDAQ: GOOGL ), over market share in Russia. Norilsk Nickel ( OTCPK:NILSY ) announced that since the start of its buyback program, it purchased 1,186,534 ordinary shares for a total amount of approximately $186 million. The company has also announced a successful placement of $1 billion in eurobonds . The 7-year bonds bear an annual interest rate of 6.625%. Norilsk Nickel has also secured a $1.2 billion credit facility from Sberbank. Via an asset swap , Gazprom strengthened its position in the European gas storage and sales segment. It has also expanded its exploration and production activities in the North Sea. Gazprom also started construction of the Ukhta-Torzhok-2 gas pipeline that will feed natural gas to Nord Stream 2. Polyus Gold announced that the Independent Committee of the Board reiterated its opinion that the takeover offer of $2.97 per share offered by Sacturino Limited is too low. Lukoil announced that it discovered a large gas field in the Romanian deep sea offshore. Drilling intersected a 46-meter thick productive interval. The seismic data indicates that the area of the gas field can reach up to 39km 2 and it may contain 30 billion m 3 of natural gas. The voices against the anti-Russian sanctions keep on growing. The President of the European Commission, Jeaun-Claude Juncker declared that Europe must improve its relationship with Russia: We must make efforts towards a practical relationship with Russia. Russia must be treated decently. We can’t let our relationship with Russia be dictated by Washington. Conclusion Some positive macroeconomic news, the stabilized RUB/USD exchange rate and little higher oil prices supported RSX in October. Also the political situation keeps on improving as the situation in Ukraine is calm and some of the EU representatives indicate that the anti-Russian sanctions may end soon. But also stronger oil prices are important for further growth of RSX’s share price. If the oil price keeps on improving, November may be positive for RSX as well. 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.

4 Takeaways On Alternative Opportunities Today

By Marc Gamsin, Greg Outcalt Dispersion among asset classes and individual stocks and bonds will likely increase, and that’s only one trend reshaping the landscape and redefining alternative investing opportunities. Here are four things investors should consider. 1) Higher dispersion is creating fertile ground for long/short strategies. The environment, particularly in the US, is favorable for long/short strategies. To start with, corporate and economic fundamentals are strong. We’re also seeing more volatility and dispersion – bigger distinctions between security valuations mean more active-management potential. And even though the US equity market seems fully-valued overall, we still think there are misvaluations that make long/short approaches attractive. We particularly favor strategies that can leverage increased dispersion if there’s an uptick in volatility. These strategies should use bottom-up, fundamental analysis to exploit long/short idiosyncratic – or security-specific – opportunities. We also think strategies that can take advantage of the impact of divergence in central bank policies could benefit. Interest rates are low, markets for equity and credit financing are open, and there’s been a multiyear bull market. This combination has enabled low-quality companies to survive and go public, engage in financial engineering including undesirable buybacks, and increase their debt loads. These activities are increasing the available opportunities to take short positions. 2) The environment is strong for corporate deal making. Macroeconomic fundamentals, including low oil prices, low funding costs and strong corporate balance sheets, are fueling strong deal activity. This is creating an attractive environment for event-driven investing. Corporate activity is near record highs in a number of areas, including new IPOs, spinoffs and mergers. Many of these activities result in changes to corporate structure, balance sheet composition, incentives and management quality. These events, in turn, create potential both on the long and short sides. And because organic revenue growth is otherwise challenged in the low-growth economic environment, corporate deals continue to offer solutions that could be compelling for companies. We think the ability to invest across equity and credit markets is a key to capitalizing. 3) Relative value approaches face headwinds. The environment remains challenging for relative-value credit strategies, and volatility could be high. In terms of fundamentals, debt levels at US high-yield firms are at record highs, and the ratio of downgrades to upgrades is at a post-crisis high – both are concerns. These and other factors have limited the potential upside, particularly relative to the potential downside in price. What about liquidity and market structure? Liquidity in many areas is low, even as money flowed into credit-focused investments. We think this backdrop sets up the possibility of investors being forced to sell into a less liquid market if an unexpected event occurs. Offsetting some of this risk is what seems to be a sizable amount of cash on the sidelines, ready to prop up higher-quality issues if there’s a broad-based dislocation. Of course, the environment can change quickly if an economic downturn or market decline expands distressed credit opportunities. This would be especially true after a long bull market, in which weaker firms have been able to easily raise new debt and extend debt maturities. Strategies nimble enough to move into these areas of opportunity as they emerge could find a very rich opportunity set. 4) Some promise in emerging macro trends…with a caveat. Macro-level trends are becoming more prominent, creating more appealing opportunities than in recent years. There are mounting geopolitical risks, including tensions in Ukraine and Russia, the threat of ISIS and economic question marks in the euro area. Heavy government debt is combining with slower global growth, market volatility is rising, and central bank policies are diverging. In emerging markets, lower commodity prices are causing dislocations. And when the US Federal Reserve raises interest rates, it should boost the dollar and put downward pressure on longer-term bonds. This environment could provide the foundation for several long-term trends, creating potential for macro strategies. However, the long-term potential for strategies that haven’t yet experienced a low-but-rising interest-rate environment remains unknown. And the concentrated bets and high levels of leverage that these strategies often use continue to give us pause. The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Marc H. Gamsin, Head and Co-Chief Investment Officer – Alternative Investment Management Greg Outcalt, Co-Chief Investment Officer – Alternative Investment Management