Friday, February 07, 2014

Investing in Russia after the Sochi Olympic Games?

Can Winter Olympics Give Russia ETFs a Boost? By Zacks Investment Research

Russia was once a hot FDI destination but the country has lost its appeal as a valuable investment proposition over the years, thanks mainly to its slowing growth rate. The country is now growing at a rate of just 1.5% (or less) a year, a considerable decrease from 4.3% snapped two years ago. However meager the growth was in 2013, it mainly came from domestic consumption. Investment was too dull to mention.

Russia is a commodity rich country with a focus on oil, natural gas and nickel. Its all-important energy sector contributes one fourth of its GDP and more than half of its total exports. Since 2013 was not rewarding for commodities , Russia’s sharp downturn in growth becomes self-explanatory.

Reduced Growth Outlook

Last month, Russia’s economy ministry slashed 2013-2015 GDP outlook to reflect sluggish corporate investment and listless growth in consumer demand. Growth outlook now remains 1.4% for 2013 (down from 1.8%), 2.5% for 2014 (down from 3.0%) and 2.8% for 2015 (down from 3.1%). The rates are really too modest to dip a toe in Russian Equities.

To add to this, the poor demography and complicated legal framework are crippling the nation’s long-term growth potential thus prompting foreign investors to flee the country. Also, better-than-expected U.S. labor data hinted at a possibility that the pace of the QE tapering might ratchet up in the course of 2014 posing another round of threat to emerging market.

Amid such a backdrop, as investors grow more uncertain over the health and near term future of Russia, many are taking a closer look at one of the pillars of the BRIC nations thanks mainly to two big global events – Winter Olympics 2014 and World Cup Football 2018.

Can Investment Turn Around?

Reportedly Russia is spending $50 billion to prepare for the 2014 Sochi Olympics that will run from 7–23 February, much higher than the previous estimate of $12 billion. Russian Railways invested $8.7 billion in linking the coastal and mountain Olympic villages by rail and road.

The event will definitely give a thrust to Russia’s tourism. The country’s state-owned lender Vnesheconombank issued $7.5 billion worth loans to investors monitoring construction projects for the visitors expected flock to the south resort town this February.

If this was not enough, Russia should see a wave of spending thanks to another big event – World Cup Football – coming up in 2018. In short, the nation should see in spike in infrastructural investment in the coming period.

Though the World Bank also trimmed 2013 growth forecast from 1.8% forecasted in September to 1.3% in the December last year, the bank expects growth to speed up in 2014. Growth is estimated at 2.2% for 2014 and 2.7% for 2015. The bank also anticipates that “investment activities will slowly pick up, as the destocking cycle comes to an end and consumption growth will level out”.

Investors should also note that unlike many prominent emerging nations, Russia runs a current account surplus. Its unemployment levels also remain low. Its currency ruble has shown more resilience to the greenback compared to other emerging markets, while any spike in oil price will likely give a big-time boost to the Russian economy.

ETF Impact

The Russian ETFs like Market Vectors Russia ETF (RSX) and SPDR S&P Russia (RBL) added a respective 0.17% and 0.86% in the final quarter of the year, in line with the broader emerging market fund iShares MSCI Emerging Markets ETF’s (EEM) gain of 0.55%.

Although there are some other products in the Russian market, investors seeking the biggest and most liquid option in the Russia ETF world, look no further than the oldest option – RSX. Thus, for investors looking to ride out the upcoming event, we have detailed RSX below.

RSX in Focus

The product trades about 3.6 million shares a day and holds $1.14 billion in assets, suggesting tight bid/ask spreads for investors. The fund charges 62 bps in fees. The fund invests its asset base in a portfolio of 48 securities and appears to be concentrated in the top 10 holdings, which constitute 59.1% of the total asset base.

In terms of sector exposure, energy dominates, making up nearly two-fifths of the total portfolio. It is closely followed by the materials sector, which accounts for about 15 of the total. RSX slumped by 5.9% in 2013.

Technical indicators also show some signs of hope. The relative strength Index for RSX is presently 42.68, almost near the oversold territory which indicates that the fund might bounce back in the near term. Its short-term moving averages also are above the long-term average this giving another bullish signal for the near future.

Bottom Line

Russia desperately needs some policy reforms to encourage companies to invest more generously in the coming period and cash in on the other global event post Olympics. These upcoming events will undoubtedly be real tests for the nation and it isn’t irrational to assume that Russia will leave no stone unturned to prove itself on the world stage. Also, while the long-term outlook continues to be bleak as of now, investors can only hope to gain out of this oil-rich nation in the near term.

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