Collapsing oil prices and ruble rout shake markets.
The Russian ruble is in an unprecedented free fall, dropping nearly 19 percent since Monday. The Russian stock market is hurting too. Investors who own Russian equity ETFs have now seen their securities plummet by more than 50 percent year-to-date.
Plenty has happened in recent weeks to bring Russian financial markets to where they now stand. Market analysts and economists say the main driver of the weakness is the sharp decline in oil prices, now at five-year lows, given abundant supplies at a time when global demand is shrinking. Russia is a major oil exporter—oil, along with natural gas, represents about 50 percent of Russia’s revenues—and cheap oil is hurting its economy.
But the impact of oil is being exacerbated by a roster of international sanctions that have been in place following Russia’s stance on the Crimean Peninsula earlier this year. Geopolitical risks are also weighing on the Russian economy.
“You see so many geopolitical dangers percolating from Russia over the course of the last several weeks,” Ian Bremmer told Bloomberg news today. “These are the kinds of things that will get more dangerous in coming days.”
Central Bank Tries To Prop Up Ruble
Russian policymakers are trying to shore-up the ruble, but so far to no avail. The Russian central bank intervened again this week, lifting its benchmark interest rate 650 percentage points to 17 percent, Bloomberg reported.
The idea is that higher borrowing costs should help anchor the currency and keep inflation in check, but the unexpected move didn’t do much to stop the bleeding. Instead, some economists now worry that rates this high will suffocate the Russian economy, and lead to a recession next year.
Funds such as the Market Vectors Russia ETF (RSX | B-67), the largest Russian equity ETF, with $1.6 billion in assets, has already seen its share-price drop by more than half year-to-date. RSX, which invests in Russia-listed as well as Russian companies incorporated or listed overseas, is down 56.4 percent since Jan. 1.
The $201 million iShares MSCI Russia Capped ETF (ERUS | B-94) has been tracing a similar path, as the chart below shows. ERUS tracks a market-cap-weighted index of securities listed on Russian stock exchanges.
Chart courtesy of StockCharts.com
“Despite the fact that Russia is the cheapest country in our universe, we currently don’t own it,” Accuvest’s Dave Garff told ETF.com. “The fundamentals are deteriorating, risk is high and increasing, and momentum is terrible.”
“Above all, we believe that current political situation is quite risky, and thus are avoiding Russia entirely for the moment,” he added.
Beyond Russia-specific ETFs, broader baskets of stocks that include Russia are also feeling the pinch, such as the iShares MSCI Emerging Market ETF (EEM |B-96), which allocates about 3.2 percent to Russia. EEM is now down nearly 9 percent year-to-date.
The Value Angle
Another ETF that comes to mind here is the Cambria Global Value ETF (GVAL | F-31), which came to market in March. GVAL specifically sets out to own value stocks—think cheap stocks—around the globe.
The fund tracks an index that selects the top 25 percent of countries from a list of 45 developed and emerging economies, and then selects approximately 100 securities from those countries. A total of 10 percent of the portfolio is tied to Russia.
To Meb Faber, the GVAL's head and the founder of Cambria, beaten-down markets are prime value opportunities, and investors should embrace them rather than shun them.
Do P/E Ratios Point To Opportunity Among BRICs?
If you look at valuation metrics such as price-to-earnings ratios, Russian equities currently look like a steal relative to other BRIC nations for value investors. The P/E ratio is essentially a valuation ratio that tells you how the price of the stock compares to its earnings.
Consider that iShares’ ERUS’ P/E ratio is 5.27, according to iShares data. By comparison, the P/E ratios in three ETFs, each representing one BRIC nation, are substantially higher:
- The iShares MSCI China ETF (MCHI | B-34) currently has a P/E ratio of 10.29.
- The iShares MSCI Brazil Capped ETF (EWZ | B-97) currently has a P/E ratio of 13.69.
- The iShares MSCI India ETF (INDA | C-91) currently has a P/E ratio of 19.99.
As Faber puts it, valuations are highly correlated with drawdowns, so when you are investing in some of the cheapest valuations, you are probably owning what many investors consider to be terrible markets.
Diversification Is Key
But in his view, value investing works because returns can turn around quickly when things “go from horrific to not-as-bad, to merely just bad,” he told us in a recent interview. In fact, Russian-linked ETFs such as RSX and ERUS were already trading marginally higher today.
The catch here, in Faber’s view, is to stay diversified by owning a diversified basket of countries rather than a single-country ETF. Russia represents 10 percent of GVAL’s portfolio.