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A 2016 Russia ETF Sequel Is Hard To Forecast

December 2, 2015 8:40 am
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By the standards of the other major exchange-traded funds tracking the BRIC nations, the 13.4 percent year-to-date gain posted by the Market Vector Russia ETF Trust (NYSE: RSX) is simply stellar. Actually, compared to nearly any emerging markets ETF, single-country or diversified, RSX and rival Russia ETFs have been a dream come true this year.

Focus On Russia

RSX's upside is all the more impressive when considering Russian stocks have surged in the face of tumbling oil prices. The United States Brent Oil Fund, LP (NYSE: BNO), relevant here because Russia prices its oil in Brent terms, has plunged more than 35 percent this year. Russia is the world's largest oil and natural gas producer that is not a member of the Organization of Petroleum Exporting Countries (OPEC).

Related Link: Russia Rally Reveals Love For Leverage

RSX, the largest Russia ETF, allocates nearly 43 percent of its weight to the energy sector. That is to say, by any practical account, Russia ETFs have defied the odds this year.

The Element Of Energy

However, with oil prices continuing to fall, investors need to answers regarding whether RSX and its peers can offer repeat performances in 2016.

“Crude prices at that level will push the economy to depths that would threaten the nation's financial system, according to 63 percent of respondents in a Bloomberg survey. Lower prices for the fuel are next year's biggest risk for Russia, which is unprepared to ride out another shock on the oil market, most economists said. Other dangers for 2016 include geopolitics, strains in the banking industry and the ruble, according to the poll of 27 analysts,” according to Bloomberg News.

Investors do not appear nervous about what 2016 will bring for RSX. The ETF has attracted more than $95 million in new assets this quarter, bringing its year-to-date inflows total to nearly $253 million. That is good for the second-best asset-gathering pace among the four major single-country BRIC ETFs. Still, those glossy numbers cannot obfuscate weakness in Russia's energy sector.

“The sector outlook for Russian oil and gas companies is negative for 2016 due to Fitch Ratings' expectation of continued low oil prices, higher taxes, an end to recent oil production growth and a gradually increasing impact from Western sanctions. Leverage metrics for most companies are likely to remain reasonable for their ratings, but the sector's rating outlook is also negative as most ratings are capped by the Russian sovereign's 'BBB-'/Negative rating,” said Fitch Ratings in a recent note.

Fitch added that dwindling earnings could further depress Russian energy sector earnings. Either, markets have to reconcile that fact, or other sectors start driving upside for Russian equities. Financial services and consumer staples could be important catalysts, as those sectors combine for 24 percent of RSX's weigh, according to Market Vectors data.

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