For global investors, Russia has gone from hero to zero in two months. What's going on?
After beating the other big four emerging markets last year, Russian stocks have hobbled into 2017. Last year, the Van Eck Russia (RSX) fund was only beat by BlackRock's iShares MSCI Brazil (EWZ), and Brazil only beat because its beleaguered oil firm Petrobras rose over 100% last year. But if you include Van Eck's Russia Small Cap (RSXJ) fund in there, which is the more sanctions-proof of the two funds, then Russia wins. This year, RSX is down 4% while RSXJ is up 3%. That's nothing to brag about. Russia is underperforming the benchmark MSCI Emerging Markets Index, which is up 9.2% year-to-date.
Russia is now the worst emerging market of 2017. Strong 2016 performance, an overweight investor base taking profits, a pause in the oil price rally and the current drama surrounding Russia in Washington have all contributed to the sell-off, Renaissance Capital's research team lead by Daniel Salter in London said in a note on Monday. "Absent any dramatic moves in oil or geopolitics, we see Russia as a slow-burn improvement and rediscovery story in 2017," Salter says, based on economic progress being made towards the 4% inflation target, interest rate cuts and consumer spending. Renaissance is forecasting 1.7% growth this year and are still overweight.
See: Russia Survived Sanctions And BlackRock Goes Overweight -- Forbes
Russia continues to be a negative headline in the U.S. The Democratic Party and some within Washington are doing their best to embarrass Trump and call off his detente with the Russians. To date, there has been no confirmation of foul play between Trump and Russian officials.
"We are trying to ignore the headline drama on Russia," says Michael Reynal, a long time holder of Russian stocks at Sophus Capital in Des Moines.
See: Sorry John McCain, Americans Approval Of Russia Almost Doubles -- Forbes
Last week, Foreign Policy magazine published a contrarian point of view on Vladimir Putin that called into question his newfound "supervillian" status. "Russia is not nearly the global menace that many fear, nor is it doomed to collapse," says Villanova University professor Mark Lawrence Schrad, author of the book "Vodka Politics". On any given day, American social media is lit up with Ukraine activists, most of them American advocacy journalists, who make daily notes of Russian atrocities in Syria and Ukraine, often exaggerating their claims and rare to offer an objective view.
"The negative headlines made Russia a harder sell last year for us," says Gerardo Zamorano, a fund manager with Brandes in San Diego. "This year it has been an easier story to sell."
See: Fake News: Reports Of Putin Closing Down Anglo-American School False -- Forbes
From an overall third-best performing emerging market in 2016, which saw MSCI Russia rallying 49% in dollar terms, Russian equities languish in last place. Greece is the only other market in emerging markets in negative territory year to date. Other commodity exporters have performed better this year, with Brazil, Chile, Peru and South Africa all doing better than Russian investors.
At its peak, the Russian equity market -- in dollars -- had rallied 88% from January 2016. "We suspect that fast-moving money may have moved on as expectations have been ratcheted back on the potential for an early easing of sanctions," says Salter and his research team in their note today.
The oil price rally stopped out at $55 a barrel with Barclays giving it another $7 upside before retreating. Russia has traded up and down with oil since the Micex was open to foreigners. Last year was no exception and MSCI Russia’s 41% rally as the oil price moved from $36/bbl (at end-2015) to $56 (on 1 March 2017) coincided almost exactly with the 43% return that the long-term relationship between Russian equities and the oil price would suggest.
On the economic front, a pick up in bank lending (2005-2006) and/or reform (2000-2004) have also allowed Russia to show positive dollar returns even in the absence of rallying oil. Renaissance Capital, a mostly Russia-focused investment house, thinks that falling inflation, interest rate cuts coming again later this year, and a growing economy are still good news in a country that can sure use some.
