ETF Shopping List for Russia's Recovery

Since declining by nearly 75% in 2008, Russia has shown a quick turnaround in 2009. Lingering problems, however, still impede the recovery of the country’s economy and related ETFs.

Russia’s GDP is expected contract 7.5% this year, and the government is forecasting 2% growth in 2010 while many independent economists are estimating growth of as much as 5% next year, reports Jason Bush for Forbes.

Russia’s economy grew 0.6% in the third quarter from the previous three months, but GDP was 9.4% lower than last year’s levels, writes Nataliya Vasilyeva for BusinessWeek. The Economic Development Ministry stated that the improvements were attributed to less capital outflow and to companies replenishing stocks.

Manufacturing and agriculture have been the main industry drivers, with agricultural activity increasing by 10% and industrial production increasing by 5.1%. Retail sales diminished 9.9% on the year in September.

The downturn hit Russia hard for three primary reasons, Bush at Forbes says. These are reasons to use caution when investing in Russia and to have an exit strategy in place.:

• One reason is oil prices – they plummeted, and Russia plummeted along with it. They recovered somewhat, and so did Russia.

• Another reason is their companies’ idiosyncrasies, which include holding copious stocks of inventory and engaging in cost-plus accounting, which means companies initially resist price cuts by reducing wages. These two reasons helped explain why Russia’s output plummeted early in the downturn.

• Furthermore, Russia’s financial sector is still struggling and bad loans are expected to reach 20% by the end of the year.

• Market Vectors Russia ETF (NYSEArca: RSX): up 119.9% year-to-date

• iShares Emerging Markets Eastern Europe Index Fund (NYSEArca: ESR): down 8.4% in the last week, recently launched; Russia is 75%

• SPDR S&P Emerging Europe (NYSEArca: GUR): up 68.5% year-to-date ; Russia is 65%

• Dow Jones Emerging Markets Energy Titans (NYSE: EEO): up 5.9% in the last three months; Russia is 36.3%

Max Chen contributed to this article.

Comments

[Mad Hedge F...:]

lsw Last January I was extremely positive about building long equity exposure in Russia, one of the two BRICKS that is a big energy exporter (click here for the call ). I predicted that the Market Vectors Russia ETF (RSX) would deliver double the upside of the S&P 500 in the imminent bull market. Well I lied. It actually tripled, while the Dow eked out a measly 70%. It even would have worked as a market neutral pairs trade, long Russia, short the US. This was an oil play on steroids, and with crude then trading in the $30s, how hard of a call was that? A recovery in the ruble also gave you a nice hockey stick effect in the dollar traded ETF. The bounce in the Russian currency stopped the country’s reserve outflow dead in its tracks, and enabled the Russian Central Bank to start slashing interest rates from the nosebleed territory of 13%. There is plenty of room for further cuts. But Russia is not out of the woods yet. Some 30% of the $780 billion in corporate debt is due for rollover this year, and the unemployment rate is at 9.5% and climbing. It also doesn’t help that they lock up oligarchs on bogus tax charges, and will expropriate foreign assets at the drop of a hat, as they did from Shell and British Petroleum. But none of my investors told me I could only do business with nice people who gave me a warm and fuzzy feeling. A rising oil price atone for all sins, as any Middle Eastern sheik can attest. You might want to take a shower after you write the trade ticket, buy hey; sometimes you just have to follow the money. Just watch out for the volatility.

Nov 05 09:32 AM