Will Russia ETF's Plunging Valuation Lure Buyers?
Add the $1.75 billion Market Vectors Russia ETF (NYSE: RSX) to the list of emerging markets funds that look attractive on the basis of valuation. RSX, the oldest Russia ETF and the largest by assets, has gained 4.1 percent in the past three months, but last week's 3.1 percent tumble has the fund trading a massive discount to the iShares MSCI Emerging Markets Index Fund (NYSE: RSX).
The discount is 32 percent to be precise and the widest since early August, Bloomberg reported. As of September 30, RSX had a price-to-earnings ratio of 6.54 and a price-to-book ratio of 0.88, according to Market Vectors data. By comparison, EEM had a P/E ratio of 17.3 a price-to-book ratio of three as of September 28.
Through the first four months of this year, RSX was no worse than the second-best performer among a quintet comprised of itself, EEM, the WisdomTree India Earnings ETF (NYSE: EPI), the iShares MSCI Brazil Index Fund (NYSE: EWZ) and the iShares FTSE China 25 Index Fund (NYSE: FXI). Now, on a year-to-date basis, RSX is the second-worst performer, trailing only EWZ.
RSX, which devotes 41.1 percent of its weight to energy stocks, is up 5.1 percent this year, but that gain has been accrued with volatility of 29.3 percent. That is 320 basis points higher than the next closest of the aforementioned funds, that being EPI.
Tumbling oil prices have hampered Russian equities and RSX. The U.S. Oil Fund (NYSE: USO) is off almost seven percent in the past month, a slide that would spell bad news for any ETF with a 41 percent to the energy group. Interestingly, Market Vectors is careful to note RSX has the lowest energy allocation of the major Russia ETFs.
By comparison, the iShares MSCI Russia Capped Index Fund (NYSE: ERUS) devotes almost 56 percent of its weight to oil and gas stocks. That ETF has a P/E ratio of 8.4 and a price-to-book ratio of almost 2.6.
This is how deep the current discount is for Russian equities. The current forward P/E of the Russian equity market is 5.2 and the price-to-book ratio is 0.8, according to J.P. Morgan. The 10-year average P/E ratio is 7.9 with a price-to-book of 1.3.
The current price/cash flow for Russian equities highlights a case for calling stocks in the world's largest non-OPEC oil-producing nation cheap. Russian stocks sport a P/CF of 3.6, well below the 10-year average of 4.9, according to J.P. Morgan.
Compelling valuations may not be enough to lure investors to Russian ETFs and the stocks those funds hold. Oil prices are tumbling amid slowing global growth and international investors are fretting over what another possible 12 years of Vladimir Putin in power could mean for the Russian economy. Not to mention, EEM has outpaced RSX by 140 basis points since the last time the latter traded at such a steep discount to the former.
The recent performance of RSX seems to indicate investors are not biting at the valuation carrot, at least not yet. Based on P/E and price-to-book, RSX is far cheaper than EWZ, FXI and the iShares S&P India Nifty 50 Index Fund (NASDAQ: INDY). Yet over the past month, RSX is the worst performer in that quartet by a wide margin.
Russia backers can find solace in the fact that eventually, emerging markets bulls do embrace attractive valuations. In large part, that explains the torrid pace set by China ETFs over the past month. Then again, some investors had been calling Chinese equities cheap for over a year before FXI and friends legitimately rallied.
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