- The Ukrainian conflict has created a significant, measurable sentiment cost for the Russian stock market.
- A sociological barometer of sorts is in play with which to view (and trade) the economic impact of the conflict.
- Peace will prove uber-bullish for Russian equities.
The secret of a successful trading experience is often like playing cards. The way we respond to what unfolds has everything to do with the decisions we make along the way.
Much can be learned by observing how something acts under certain conditions. For example, repeating patterns: if it happened once, it can happen again; and if the outcomes were good before, they'll likely repeat again.
Which leads me to the precedent of the very costly (to Russia) Ukrainian conflict. The $460 billion Russian Stock market - the MICEX Index - lost almost $60 billion (13%) the day Russia invaded Crimea. It had already lost an additional $100 billion (16%) in the 4-month run-up to the invasion. (See: Russian Stocks Plunge on Ukraine Crisis; Equity Index Sheds $58B, by Matt Egan, Fox Business News, March 3, 2014)
At the March lows, the Russian stock market had a price-to-earnings ratio of 4. By any measure, Russian equities were dirt-cheap, but there was a reason for this too.
For one side of that story, see Why the (Russian) Stock Market Is Doomed to Be Cheap, by Kim Iskyan, Moscow Times, March 18, 2014; and for another, more favorable one, read Russia: The Cheapest Emerging Market You're Overlooking, by Jeff Opdyke (Seeking Alpha contributor), May 18, 2014.
The important thing, however, is that after a long downturn, Russia has now become investable again on the buy side. War was the floor, the support level for prices; peace will be the ceiling, the breakout to the upside, the only viable economic solution to the conflict.
A sociological barometer of sorts has evolved with which to trade the Russian stock market. I use the Direxion Daily Russia Bull 3x Shares ETF (NYSEARCA:RUSL), but the Market Vectors Russia ETF (NYSEARCA:RSX), the iShares MSCI Russia Capped ETF (NYSEARCA:ERUS), or the Market Vectors Russia Small-Cap ETF (NYSEARCA:RSXJ) could also be utilized. These ETFs are primarily a composite of Russia's strengths: the mining, oil, gas, telecom, and banking sectors.
The Direxion Daily Russia Bull 3x Shares ETF is a leveraged fund that seeks daily investment results of 300% of the performance of the Market Vectors Russia Index. The other Market Vectors ETFs listed below are not leveraged (1x), and are more appropriate for less aggressive (risk-averse) investors.
|Market Vectors Russia ETF - RSX||Holdings|
|Market Vectors Russia Small-Cap ETF - RSXJ||Holdings|
|iShares MSCI Russia Capped ETF - ERUS||Holdings|
Russian ETF funds have experienced a resurgence in investment since the Russian government has shown an interest in easing tensions on the eastern border of Ukraine.
Russia has been my most successful trading experience this year, buying at the lows of the MICEX twice, and carefully selling in increments as the prices rose through the barometer.
$12 is the floor for the RUSL, the brink from which participants have pulled back twice. As prices rose through the barometer, the secular situation improved and resolution evolved from a fading hope to a viable light at the end of the tunnel.
But it has also receded, as when the situation worsened in April, creating a second buying opportunity. The important thing is that the primary direction appears to be up.
If concrete peace talks actually evolve - which the new president of Ukraine and Russian President Putin have both said they want - and the gas situation with Ukraine is also resolved, then the RUSL could easily rise from the conflict zone ($12-$19) to prices above $20, precisely where/when the conflict began in Autumn.
Here is a chart of the RUSL, with the conflict prices circumscribed below the lower green trendline.
The trade is to buy anywhere at $18 (or less) and hold for the $20s.
For the unleveraged RSXJ (below), the trade is to buy at $35 and hold for the $40s.