Russia ETF: Up on Energy Prices

Even with increasing world inflation, many markets are well placed in this environment because of their broad exposure to commodities that are the center of increasing prices. The first country that comes to mind is Brazil, which seems to be a good play, but on valuation I believe Russia is better positioned.

The ETF Market Vectors Russia (RSX) is a Russian specific fund with no companies outside of Russia involved. Russia looks as good as it does because of their large oil reserves. It is currently the number two producer in the world of oil, and also has large natural gas and coal reserves. This ETF gives the investor a chance at investing in Russian stocks that do not have ADR's.

On May 30th, Investor's Business Daily reported that Russia had posted ten years of economic expansion. Personal incomes are increasing at a 12% annual clip, which is still 2.5% above inflation. The RSX appropriates funds to 94.6% large cap, 5.3% medium cap and .1% small cap stocks. 39.6% are oil and gas stocks, 24.5% are iron and steel, 12.7% are communications, 11.2% are finance, 8.9% other and 3.1% agricultural stocks as per the ETF's index.

When comparing energy ETF's to the performance of RSX we see that the US Oil Fund (USO) and US Natural Gas Fund (UNG) outperform RSX by a wide margin. Year to date RSX is up just under 10%, while the USO is up just under 50% and the UNG is up almost 70%. Steel has done well this year also and the Market Vectors Steel ETF (SLX) is up 20% since January 1. These commodities as example and a firm belief in inflation should continue to aid in this countries expansion. Remember, it was not that long ago that the USSR was the world's number two super power.

The inflows of money from energy, steel and iron have expanded jobs and the middle class. This will continue to help Russia's cellular market which is very assessable to this country. Vimpel Communications (VIP), Mobile Telesystems (MBT), and Rostelecom (ROS) are all fast growing telecoms that have outperformed for a few years as it seems that everyone in and around Russia needs two cell phones.

The phone infrastructure was not set up in Russia for landlines like the United States. The access to telephones is much less, so instead of investing in land telephone infrastructure, Russia did what many others have done and went right to cellular, building towers and saving a lot of capital. Look for this area to be very profitable through the end of the year.

With the majority of the fund in energy and steel, they look well placed going forward. Since Russian stocks have underperformed, at some point they will have to catch up on valuation and they seem to be in the right areas to do it. It is all in what you believe. If you believe there will be higher inflation going forward, like I do, it will be a good investment.

I think that the US is stuck regarding rate moves and will just have to let these problems pan themselves out.

The only downside to Russia is political, as many of these companies have been very good to their investors over the years. When you think about it, I do not believe that this is a problem. Putin has a stranglehold on that country and things have gone well enough there that their citizens don't seem to mind. The main reason I would invest in this ETF is my firm belief in long term oil bullishness. I think that oil has overshot itself for the short term and it will probably pull back, but the price target of $150 does not seem out of line for the next twelve months.

Disclosure: None.

Comments

[pockyclips2020]

UNG! UNG! UNG! Hockey back in the day. Natural gas today.
Lack of investment infrastructure will prevent Russia from realizing
the wealth they hold. I don't see anyone without Kremlin ties stepping up to the plate. Not a good place for outsiders.

[BrianPursley]

Russians are the biggest oil producer in the world because they realize oil comes from the mantle and not living organisms: oilismastery.blogspot..../