The Market Vector Russia ETF Trust (NYSE:RSX) is one of this year's best-performing emerging markets single-country exchange-traded funds with a gain of 29 percent. That is well ahead of the 17.3 percent gain posted by the MSCI Emerging Markets Index.
Russia And RSX
Much of the ebullience surrounding Russian stocks, RSX and rival Russia ETFs is attributable to rebounding commodities prices, namely oil, but there are some other catalysts for Russia funds. Although the economy there is mired in its worst post-Soviet era recession, some data points suggest things are not as bad as previously believed regarding Russia's economy.
Add to that, some market observers see positive signs from Russia's banking sector.
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Most Russian banks have ample foreign-currency (FC) liquidity. The sector's FC assets exceed liabilities and refinancing risks are low, said Fitch Ratings in a recent note. Russian banks had a USD25 billion net positive FC position at end-March 2016. The sector's USD112 billion of external market debt does not give rise to significant refinancing risk, as the majority of this matures over the medium to long term. The sector holds liquid external assets of about USD40 billion and can access FC liquidity domestically to support near-term repayments, for example through the central bank's FC repo facility.
RSX reflects the Russian economy's dependence on energy commodities with a 37.9 percent weight to the energy sector. That is more than double the ETF's second-largest sector weight materials, at 18.4 percent.
However, financial services stocks are RSX's third-largest country weight at 14.7 percent, indicating it is advantageous for the largest Russia ETF to get some help from this sector. Additionally, Russian banks are key contributors of dividends from that market along with energy companies.
We also believe the Russian sovereign, as a backstop liquidity provider, would help Russian banks, and, through them, corporates, to refinance their external obligations, unless further major shocks put significant pressure on reserves. Russian state-controlled banks and companies account for about 60 percent of external market debt, strengthening our view that FC liquidity support would be available, added Fitch.
As is often the case, Russian stocks are inexpensive. At the end of the second quarter, the price-to-earnings ratio on RSX was more than 400 basis points below the comparable metric on the MSCI Emerging Markets Index.
Russia's central bank has recently been proactive and credible in managing the country's monetary policy, providing another source of strength for the country's banking sector.
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