Russia ETFs Reel From Crumbling Ruble, Rate Hikes

With the ruble crumbling to rubble, investors in Russia ETFs are fleeing the dust.

The country’s stocks nose-dived Tuesday after a massive interest-rate hike failed to prop up the currency, leading to worries about capital controls, as reported by IBD.

The losses exacerbate Russia’s market performance woes: its stock market and currency have fallen more than 55% and 47%, respectively, in 2014.

“A substantial part of the decline is explained by the 32.4% price decline of oil, since Russia is a major producer of oil, and part of the impact is due to U.S. and Western sanctions imposed on Russia over the Ukrainian situation,” senior index analyst Howard Silverblatt of S&P Dow Jones Indices wrote in an analysis Dec. 4.

Market Vectors Russia (ARCA:RSX) — the largest ETF tracking that country’s equities, with $ 1.24 billion in assets — has nose-dived 30% in the past month and 50% so far in 2014.

Its junior counterpart, Russia Small-Cap (ARCA:RSXJ), has been pummeled even more: 31% and 57% over those same periods. Both ETFs hit 52-week lows on Tuesday before bouncing back somewhat.

In a shock move Dec. 15, Russia’s central bank hiked the benchmark interest rate to 17% from 10.5%. It was a desperate attempt to prop up the currency.

“Raising rates is an attempt to attract foreign investors to buy Russian bonds at 17%,” thereby shoring up the ruble, said Steve Blumenthal, CEO of CMG Capital Management.

Top-Heavy In Energy

The fortunes of Russia ETFs are closely tied to oil and gas; energy stocks make up 40% of RSX’s portfolio. The highly concentrated RSX’s top 10 holdings include Novatek, Lukoil (OTCPK:LUKOY) and Gazprom (OTCPK:OGZPY).

Given recent trends, many strategists advise investors to steer clear of volatile Russia ETFs for a while.

“A 200-day moving average stop loss would have protected investors and preserved capital” during the recent rout, said Blumenthal. RSX hasn’t been above the moving average since July 16.

Blumenthal added: “Consider re-entering when its price moves above its 50-day moving average.”

Emerging Divergence

The performance of individual countries in emerging markets is increasingly divergent and sensitive to falling oil prices, economists at IHS noted in a November report.

“Net oil importers will benefit, while net oil exporters will be hurt,” the report’s authors wrote.

“Iran, Russia and Venezuela are particularly at risk,” they added. “All three countries rely on oil to balance their budgets.”

Meanwhile, lower oil prices are expected to help net importers such as India, Indonesia and China, as well as key Central European countries such as Poland and Turkey.

And the U.S. could see a bump in GDP growth if low oil prices boost spending, the IHS economists said.

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