Can Russia ETFs Stabilize After Ruble Intervention? - ETF News And Commentary

Russian ETFs – which have been one of the worst performers this year – took a breather after the Russian central bank recently announced a major policy shift. The central bank would now allow the value of the ruble to float freely in the market, thereby reducing its regular interventions.

The bank would also be tightening supplies of the ruble to discourage domestic investors from betting against the currency. It said that it would eliminate the trading corridor it has been setting earlier. This is expected to prevent speculative trading activity in the currency market. However, the bank has committed to intervene in the markets in case of financial stability threats.

The latest action is expected to provide some relief to the plunging ruble after most of the previous policy actions taken by the bank failed to arrest the slide in the currency. The ruble continued to plunge despite the central bank spending $30 billion in interventions during recent weeks as part of its previous exchange rate policy mechanism and hiking interest rates sharply to 11% from 9.5%.

The ruble jumped more than 1% following the latest measure after having tumbled more than 30% against the dollar this year (read: Will the Russia-Ukraine Natural Gas Truce Warm Up Russia ETFs?).

ETF Impact

The move and the jump in the ruble led Russia's Micex stock index to jump 1.2% higher. Most of the ETFs in the space including Market Vectors Russia ETF (RSX), iShares MSCI Russia Capped ETF (ERUS) and Market Vectors Russia Small-Cap ETF (RSXJ) gained more than 1% following the announcement.
Still, these products have been the worst performers in the international arena this year, having lost in excess of 25% in the past one year due to the ongoing conflict.

Will The ETFs Stabilize Going Forward?

Slowdown in the Russian economy as a result of a host of sanctions imposed by Western countries and the recent slide in oil prices are believed to be the primary factors for the ruble's plunge this year (read: Inside the Surprising European ETFs Surge).

Though the recent move by the central bank has provided some relief to the ailing currency and in turn to Russian stocks and ETFs, we believe that it's just a short-term phenomenon. “We are seeing some relief in the short-term, but the currency is certainly not out of the woods,” said Piotr Matys, an emerging market strategist at Rabobank.

Also, any country's stock market performance is arguably a good indicator of the nation's economic health. And if the economy continues to perform better, its stock market will follow the same course (read 3 Excellent ETFs for a Low Cost Diversified Portfolio).

The Russian economy in no way currently looks to be in shape being plagued by a host of factors including rampant inflation, a plunging currency, a stagnant economy and a loss of confidence among foreign investors. Thus only a move to arrest the slide in the currency is expected to provide little relief to its economy and stock markets.

In fact, the sanctions imposed by the western nations on Russia have been harsh enough to raise concerns about the latter's long-term economic slowdown. The Russian economy is expected to slow to 0.3% growth this year – the weakest since 2009. Moreover, the country's central bank recently announced that it expects no growth in the Russian economy in 2015.

Russia has seen a significant fall in its international reserves lately as a result of the sanctions and lower oil prices. Oil and gas accounts for more than half of Russian government revenue and is thus hurting its net foreign earnings, leading to capital flight from the country (read: Russia ETFs Crumble on New Sanctions, What Lies Ahead?).

Moreover, with tensions again cropping up between Ukraine and Russia, there are fears that the West might step up its sanctions, which are already sinking the Russian economy.

Thus, we might not see any long-term improvement in Russian ETFs unless Russia manages to improve its economic fundamentals. Also, all three above mentioned funds have a Zacks ETF Rank of 4 or ‘Sell' rating, suggesting that more trouble lies ahead and that they might continue to underperform in the months to come.

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MKT VEC-RUSSIA (RSX): ETF Research Reports
 
MKT-VEC RUS SC (RSXJ): ETF Research Reports
 
ISHARS-MS RUSSA (ERUS): ETF Research Reports
 
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