- The Ruble is gaining on the dollar.
- Economic developments suggest Russia is cheap.
- Russia has a strong foundation.
At this point, there would appear to be little doubt that the purchasing power of the dollar is slipping. And how long this period of inflation will last is anyone’s guess. Some time ago, I wrote an article about protecting purchasing power in an inflationary environment. One of the ideas proposed in the piece was the suggestion of investing in emerging market securities. In this composition, I propose to explore the logic behind investing a proportion of a portfolio into the VanEck Russia ETF (BATS:BATS:RSX) so that the value of invested money is maintained, or even grows.
Some followers of the Dollar Index may be mystified as to the reason why prices are rising. After all, it would appear that against the basket of currencies that make up the DXY, the dollar is holding up pretty well; as the graph below shows.
Chart courtesy TradingView
Clearly, there have been a few ups and downs, but as of today, the index is pretty much where it was a year ago. The reason for this is that the currencies which make up the DXY (Euro, Yen, Swedish Krone, British Pound, Canadian Dollar, and the Swiss Franc) are being mass-produced at a similar rate to the USD. So, with the DXY, you are comparing apples to apples, so to speak.
However, when you compare apples to oranges, that is to say when the USD is compared to currencies which are not being duplicated with the aid of a magic-money-making machine, it is a different story. There are many examples, two of which include the Ugandan Shilling and the Taiwanese New Dollar.
Graphs provided courtesy Xe
Since the Ugandan currency is largely supported by commodities and that of Taiwan by manufacturing, they serve to illustrate contributory factors for the price rises evident in supermarkets all around the US.
A currency that is somewhere between the two is the Russian Ruble. That is to say that the currency is backed by both a booming commodities sector and growing industrial production. For the US, it was recently reported that there was a slowdown in economic growth in the third quarter to 2%, as the table below shows.
Chart courtesy Bureau of Economic Analysis
In contrast, the Russian economy is expected to grow by in excess of 4% for the current year. Given these factors, the Ruble has strengthened by around 10% against the USD, as the graph below illustrates.
Graph provided courtesy Xe
For many years, the Ruble was in intensive care on life support, but in February 2019, Russian Government bonds became investable again. According to Moody’s “The upgrade of Russia's ratings reflects the positive impact of policies enacted in recent years to strengthen Russia's already robust public finance and external metrics and reduce the country's vulnerability to external shocks including fresh sanctions”.
Considering the debt to GDP ratio for Russia, one would have to agree that the country is on a sound financial footing. As you can see from the table, the ratio for Russia is around 18%, whilst for the US, it is a staggering 128%.
Debt to GDP charts provided courtesy Trading Economics
By now, most readers will know that the US is in an unfortunate predicament as regards inflation. Unable to significantly increase interest rates to resolve the problem of rising levels of inflation due to high levels of debt. The Russian Central Bank, on the other hand, does not have such restrictions. As recently as 2017, inflation was around 17%, but this was choked off with interest rates of 15%. Once again in Russia, inflation is on the march, and the Russian Central Bank is raising interest rates in lockstep to stifle inflation once again.
Raising interest rates is not the only tool that the Russian government has employed in reducing prices for its citizens. The country has also levied export taxes on grains in an attempt to lower the cost of food.
In a further boost to the Ruble, Russia has been buying gold with some enthusiasm. According to a Bloomberg report, Russia holds $583 billion in reserves, and 23% of which is now in gold.
Graphic courtesy Bloomberg
As per the report, Russia’s slump in dollar reserves is no accident since it is Putin’s declared policy to de-dollarize. Gold is now the second-largest constituent of Russia’s central bank reserves only behind euros, but ahead of the yuan, which makes up about 12% of the reserves.
To recap, investing in Russia would appear to have two benefits. First, there is every likelihood that the Ruble will maintain its strength relative to the dollar, and secondly, economic growth will support local equities in the near term.
The VanEck Russia ETF
For those readers who are unfamiliar with the breakdown of the holdings of this ETF, I suggest a visit to their website. Should you read the information provided, you may also care to note the relatively low Price to Earnings (P/E) ratio of 9.11. Compare that to the P/E ratio for the S&P 500, which currently stands at around 27. This figure may seem a tad rich based on historical figures, but it was as high as 40 for Q4 2019. Given that earnings for corporate America hit a record for Q3, it's not surprising that the P/E has dropped since then. I guess the question on many investors’ mind is, can these lofty earnings be maintained?
Another positive for the fund is the generally upward trend of the dividend. As of today, the yield is 3.89% and since the sector weighting of the fund is tilted towards energy and materials, it's easy to imagine that the dividends will increase in the near future.
For sophisticated investors, RSX might seem an ideal candidate for a carry trade. After all, it is possible to borrow USD at around 1.5% from some brokers, then get 3.9% dividend from RSX together with an asset that is likely to appreciate in dollar terms.
Whilst the RSX provides exposure to a broad range of Russian stocks, as far as I’m aware, there are no publicly-traded agricultural stocks in the fund. This is a shame since this sector is also experiencing some moves to the upside. One such stock that could have been included is the Cherkizovo Group (OTC:CRKZY), listed on the Moscow Exchange under the ticker GCHE. This company supplies the likes of McDonald's (MCD), KFC (YUM), and Burger King with meat products and is 3.9% owned by JPMorgan (JPM).
It goes without saying that investing outside of America exposes US investors to political and currency risks. Also, full disclosure, I am long the Cherkizovo Group.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of CRKZY either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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