To Russia For An Inauguration Trade

Given all the talk of Russian meddling in the 2016 U.S. presidential election and other associated theories about the relationship, if any, between President-elect Donald Trump and Russian President Vladimir Putin, it is not surprising the VanEck Vectors Russia ETF (Market Vector Russia ETF Trust RSX) is the limelight on Inauguration Day.

RSX

RSX, the largest and most heavily traded Russia ETF listed in New York, was one of last year's best-performing single-country emerging markets ETFs, thanks in large part to rising oil prices. Russia is the largest oil-producing nation outside the Organization of Petroleum Exporting Countries and RSX is reflective of that status with an energy weight of 39.1 percent. That is more than double the ETF's second-largest sector allocation, which is materials at 16.5 percent.

Inauguration Day Is Here

With Inauguration Day here, Rareview Macro founder Neil Azous is near-term bullish on RSX and Yandex NV YNDX, the Russian internet giant often called that country's equivalent of Alphabet Inc GOOG GOOGL's Google.

Yandex is the 12th largest holding in RSX at 4.1 percent of the ETF's weight. Shares of Yandex are up nearly 81 percent over the past year.

“At the country-level, long Russian equities, not credit or FX, is the standout. This runs counter to the consensus view that long Russian ruble (RUB) remains the best carry and emerging story,” said Azous in his first note of 2017, published on January 2.

Of course, oil prices will continue looming large for RSX and Russian stocks. Gazprom, Lukoil, Gazprom Neft, Novatek and Tatneft combine for a quarter of RSX's lineup and all four of those stocks are found among the ETF's top 10 holdings.

A Look Forward For Russian ETFs

“The projection for 5-year annualized forward excess returns and the Sharpe Ratio for Russian equities are very high. Fundamentally, valuation is a compelling driver of projected returns with all value-related factors being aligned, which is a rare event. Put another way, Russia is the cheapest EM stock market by far,” said Azous.

Russian stocks being inexpensive relative to broader emerging markets benchmarks is nothing new. The country is chronically inexpensive and that is the case today as highlighted by a price-to-earnings ratio of 10.1 on RSX, well below the P/E of 12 found on the MSCI Emerging Markets Index.

“Collectively, an opportunistic allocation to unhedged Russian equities looks very attractive,” added Azous.

Investors added nearly $200 million in new assets to RSX last year.