RSX: From Russia with Love?

By Brandon Clay

Ah, Russia. Home to those infamous cold winters, backdrop to so many dark classic novels and exporter of, among other things, vodka. But that’s not all investors should think of when it comes to Russia.

Despite what often appears to be political calamity and corruption at nearly every turn, Russia has one of the world's ten largest economies. Vast energy reserves mean Russia is an emerging economic power, the “R” in the now-ubiquitous BRIC acronym.

In the past, we talked about a new family of emerging market sector ETFs. You can also trade certain Russian stocks. While some Russian stocks trade in the U.S., most suffer from illiquidity. This makes a broader ETF a better way to gain exposure to this sometimes-profitable and sometimes-perilous market.

There is presently only one U.S. listed ETF focusing exclusively on Russia – Market Vectors Russia ETF Trust (RSX), managed by Van Eck Global. Barely more than two years old, RSX tracks the DAXglobal Russia Index. As such, RSX has limited ties to U.S. stock performance, making it a potential way to add some international diversification to your portfolio.

Unfortunately, on a sector basis RSX is not very diversified with a heavy concentration in energy stocks. In fact, if you find the overall energy sector attractive or are bullish on natural gas and crude oil prices, RSX may be the kind of ETF you’re looking for. At the end of May, the underlying index had more than 45% exposure to oil, gas, and other energy holdings. Industrial materials stocks account for another 18%, and telecom rounds out the top three at more than 14%.

The fund’s four largest holdings are Surgutneftegaz (SGTZY.PK), OAO Gazprom (OGZPY.PK), Rosneft Oil, and Lukoil (LUKOY.PK) each with approximately an 8% allocation. Gazprom, the state-owned natural gas giant and Lukoil, the Russian oil goliath, are names most U.S. investors have heard before. Other holdings in RSX that American investors may be familiar with include MMC Norilsk Nickel (NILSY.PK), Mobile Telesystems (MBT), Vimpel Communications (VIP), and Wimm-Bill-Dann Foods (WBD).

Recent trading shows congestion below the 50-day moving average, suggesting that now may not be an ideal time to initiate new long positions. RSX has potential support in the mid-$19 area, a point from which it bounced in mid-June.

The fundamentals of oil and natural gas are likely to dominate the performance of RSX in the near-term. While RSX may not be a good buy-and-hold candidate, its liquidity and volatility can provide traders with some decent short-term opportunities. Think of RSX as a candidate for a swing trade on bullish energy data.

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Disclosure: No positions

Comments

[Alex Filonov:]

Couple of points

1. If you have a successfull business in Russia, you get robbed by government: remember Yukos.
2. If US government is serious in stopping senseless speculation on future markets, prices of commodities, including oil, are going down. A lot.

RSX was a great short in August 2008.

Jul 07 11:36 AM

[Free Mind:]

Is Russia really the place to be right now? They are almost bankrupt, the oil dividends are flying away as we speak and they haven't yet solved their numerous economic inefficiencies...

Smart money is currently fleeing Russia, not investing in its markets (if I except Pepsi which thrives on the Russian thirst for symbols).

The next shock for the financials is expected to come from the East... Notably for European and Swedish banks, heavily burdened with loans in Eastern Europe and Russia.

Jul 07 11:37 AM

[Ron Rowland:]

Free Mind, did you read the part in the article where it says "...now may not be an ideal time to initiate new long positions.."?

Jul 07 01:09 PM

[Andrei Babn...:]

I disagree with the authors comments. I believe there is a great long term play especially if you can pick it up in the low to mid teens. Russia has still a long way to run. It has some of the world's best companies, majority of the world's natural resources and precious metals, a large population (9th in the world) and a growing middle class. Many people who have left Russia in the late 80s and early 90s are returning with western experience and ivy league degrees.

Unlike the Japanese, Russians love to spend. The gold diggers are on the hunt for the latest fashion and love to spend 50gs on chinchilla and mink coats. While the men love their gucci shoes, 10g Paul Smith suits, 75gs Breguet watches (both Putin and Medvedev have one) all to go along with the latest Maserati. While I agree that a large majority of Russia's wealth has been the direct result of high energy prices, infrastructure, education, social reforms, and health are all improving exponentially.

If you pick up RSX at 15 or below, you can easily ride it to a 100-150% return over the next 12-18 months.

Jul 08 02:17 AM

[Free Mind:]

Yes, Ron, I did read that part. But the political instability and lack of economic reform make it a doubtful place to invest on the medium term either.

Russia has not yet addressed issues dating back to the fall of communism and has not yet developed an industry of quality. And their structural deficiency with democratic politics keeps them open for a resurgence of communism or a further development of aggressive nationalism.

The main strength of Russia is commodities. But in a deflationary scenario, even that will not be sufficient to get it over its economic difficulties.

So, in my view, I'd rather forget Russia for the time being - unless there is a "velvet revolution" of some sort over there. I guess I can still be a dreamer...


On Jul 07 01:09 PM Ron Rowland wrote:

> Free Mind, did you read the part in the article where it says "...now
> may not be an ideal time to initiate new long positions.."?

Jul 08 07:04 AM

[manuel:]

I would also add uralkali (potash producer) to your analysis

Jul 08 01:39 PM

[Paul Harper:]

$24Bn deficit in Q1 compared to California ($26.3Bn)& look at the asset base they have !!

More to the point, much of this natural oil & gas trade will be with other BRIC & Emerging Markets, much of this trade will not be executed in $$$, but in currency swaps.


On Jul 07 11:37 AM Free Mind wrote:

> Is Russia really the place to be right now? They are almost bankrupt,
> the oil dividends are flying away as we speak and they haven't yet
> solved their numerous economic inefficiencies...
>
> Smart money is currently fleeing Russia, not investing in its markets
> (if I except Pepsi which thrives on the Russian thirst for symbols).
>
>
> The next shock for the financials is expected to come from the East...
> Notably for European and Swedish banks, heavily burdened with loans
> in Eastern Europe and Russia.

Jul 13 05:54 AM