Tag Archives: nysearcarsx

RSX: My Prediction For 2016

The next year is around the corner, and it’s high time to look at RSX prior to the Russian holidays. Oil stays low and poses a major threat to the economy. At current oil price levels, RSX is overvalued. Those who follow the Market Vectors Russia ETF (NYSE: RSX ) closely probably know that I’ve been bearish on Russia the whole year. Lately, I’ve been commenting on the tensions between Russia and Turkey , the impact of the continuing oil price decline on the Russian economy and the exchange rate of the Russian ruble. As the year ends, it’s logical to make a prediction for 2016 and leave the topic to develop until the end of January. Why the end of January? First and foremost, the Russian Central Bank will announce its key interest rate on January 29, 2016. In its next meeting, the Central Bank won’t have the luxury of waiting and will have to either support the economy by cutting the 11% rate or choose the course of supporting the ruble and leave the rate or even increase it. I think that this will be the pivotal moment. Also, keep in mind that Russia has long New Year holidays that last from January 1 up to January 10. In practice, low volume trading and muted business life typically last from the last week of December up to the “Old New Year” on January 14. To those interested, the “Old New Year” date is the New Year date in Julian calendar, which was observed in Russia until 1918, when Gregorian calendar was implemented. Expect increased volatility and false moves during this period. It is clear that the main determinant for both the Russian market and the Russian economy is the oil price. If you believe that oil will go to $70 – $80 per barrel in 2016, then you should clearly buy RSX or other Russian ETF. I am in the bearish camp for oil, at least for 2016. My base-case scenario for Brent oil is $40 at best, and I think that oil will first go lower and could rebound only at the end of 2016. My main point is that if oil stays at current levels, the Russian market is significantly overvalued and will drift lower. Here’s why. We’ve yet to see more action from the Central Bank, but I think that at current oil levels we will not get to the ruble-denominated oil price of 3150 which is needed for the budget. This will lead to extreme devaluation of the national currency. For example, if this was to happen right now, the ruble would have dropped from 71 rubles per dollar to 85 rubles per dollar. This is too much, as Russia still depends heavily on imports (this statement was previously challenged by some readers, but I stand by my views and tried to explain them in more detail in the comments sections of previous articles). I think that the resulting exchange rate will likely be a compromise between the needs of the budget (and all the export companies, which are the majority of the Russian stock market) and the needs of curbing inflation. My prediction is that the ruble will settle in the area which allows 2900 – 3000 rubles per barrel of oil, implying 10.5% – 14% downside for the currency and for the dollar-denominated RSX. Also, I believe that constraints that low oil puts on the Russian economy are not fully reflected in the price of RSX. The Central Bank is predicting that GDP contraction will slow to 0.5% – 1.0%, but I think that these are optimistic figures. In the current oil price environment, there is no way to balance the interest of export-oriented companies, which are the majority of RSX holdings , and the economy. This problem will result in damage to every Russian company. All in all, I think that RSX is overvalued by 15% – 20% at current oil price levels. The downside increases if oil drops further, and such a drop will likely lead to a catastrophic liquidations of positions and a huge drop of RSX. On the other hand, if oil manages to deliver a major rally, the whole thesis will go bust. The next year is already behind the corner, so we will soon know how the thesis plays out.

RSX: July Review

Summary The Market Vectors Russia ETF declined by 7.17% in July. The main reason for the decline were weak oil prices. The Russian economy is under pressure from declining oil prices once again. The Bank of Russia has to choose whether to fight inflation or to support the GDP growth. Weak oil prices will probably weigh on RSX also in August. The Market Vectors Russia ETF (NYSEARCA: RSX ) lost 7.17% of its value in July. The main reasons were declining oil prices and related problems of the Russian economy. Declining oil price leads to a weakening Russian Ruble and a weak Ruble leads to higher inflation. Russia needs to support its currency by hiking interest rates; however, high interest rates damage the economic growth. As a result, the Russian central bank needs to choose between lower interest rates resulting in higher GDP growth but higher inflation and higher interest rates resulting in lower inflation but lower GDP growth (stronger GDP decline respectively). The Russians have chosen GDP growth for now, as the Bank of Russia cut its key interest rate to 11%. The portfolio of RSX experienced some minor changes during July. Gazprom (OTCPK: OGZPY ) and Lukoil (OTCPK: LUKOY ) are not the biggest holdings anymore, as they were overtaken by Magnit. All of the top three holdings have weight over 7%. No new companies got amongst the top 15 holdings; however, the cumulative weight of the top 15 declined slightly, from 75.83% to 73.64%. Source: own processing, using data from vaneck.com Out of the 15 biggest holdings, only two companies experienced a positive share price development in July. Shares of Transneft and Uralkali grew by 5.3% and 3.35% respectively. The biggest decline was recorded by the telecommunication company Mobile TeleSystems (NYSE: MBT ). The company lost 16% of its value. Most of the decline occurred in the first part of the month and wasn’t related to any announcements of the company, as Q2 results will be released in August and the acquisition of NVision Group was announced in the second half of July. The oil & natural gas producers were negatively impacted by weak oil prices. Brent prices declined by 16% and WTI prices declined by more than 17% in July. Natural gas prices were relatively stable. Source: own processing, using data from Bloomberg Although the last three months were negative for RSX and the Russian share market, RSX is still 16% higher year to date. Out of the 15 biggest holdings, only shares of Yandex (NASDAQ: YNDX ) have declined since January (-24%) and the share price of Gazprom is unchanged. On the other hand, London listed shares of Surgutneftegas (OTCPK: SGTPY ) grew by 33%. Source: own processing, using data from Bloomberg The chart below shows the 10-day moving correlations between RSX and the S&P 500 and between RSX and oil prices represented by the United States Oil ETF (NYSEARCA: USO ). The correlation between RSX and the S&P 500 was high and relatively stable during July. On the other hand, the correlation between RSX and USO shows signs of instability. There was high positive correlation in the first and in the last part of the month but a huge decline in the middle of July. As a result, the oil price was declining over the whole of July but RSX managed to recover a part of the early month losses in the middle decade, only to decline even deeper during the last part of the month. Source: own processing, using data from Yahoo Finance Although RSX declined significantly in July, its volatility measured by the 10-day moving coefficient of variation was relatively stable, moving in the 2%-3% range for the better part of the month. Source: own processing, using data from Yahoo Finance Some of the more interesting news: Gazprom continues with preparations of the Nord Stream II project that should bring more natural gas to western Europe, via a gas pipeline beneath the Baltic Sea. Nord Stream II should build on the successful Nord Stream I project. The first Nord Stream gas pipeline was opened in November 2011. Nord Stream II should be completed by 2020. Meetings between Gazprom, OMV and BASF representatives, regarding the Nord Stream II project, took place in July. Gazprom has also announced that it will enter into partnership with NIPIGAZ in order to design and construct the Amur Gas Processing Plant. The Amur Gas Processing Plant should become the biggest gas processing enterprise in Russia and it should also include the world biggest helium production facility. Multicomponent gas from Gazprom’s deposits in the Irkutsk and Yakutia regions should be delivered via the Power of Siberia gas pipeline to the Amur Gas Processing Plant, where methane, ethane, propane, butane, pentane-hexane fraction and helium will be produced. Gazprom Neft (OTCQX: GZPFY ) announced completion of the first production well at Vostochno-Messoyakhskoye oil field. The field should start full-scale commercial production in late 2016, after the oil pipeline connecting the field to the Zapolyarne-Purpe pipeline system is completed. Gazprom Neft plans to expand also its downstream operations. It announced that it has secured the approval for construction of a new generation combined refining unit at its Moscow refinery. The new refining unit should boost light petroleum products production of the refinery by 40% and the refining efficiency should improve by 20%. Yandex has launched an interesting new product, a delivery services aggregator. The service is primarily designed for internet stores; however, it may be useful for some retail clients as well. According to the company, 83% of Russian internet users live outside Moscow but 47% of Russian internet store users live in Moscow. One of the reasons is that many internet stores don’t deliver goods to Russian regions, due to high costs, complicated logistics and administrative barriers. Yandex wants to support online shopping in Russian regions and of course get its share of the pie. It is possible that this is one of Yandex’s first steps on the way to expanding its activities into the online shopping industry. Rosneft (OTC: RNFTF ) keeps on cooperating with its foreign partners. On July 16 , the company announced that it completed pilot drilling at the North-Komsomolskoye field in collaboration with Statoil. Rosneft believes that the field holds at least 600 million tonnes of oil. On July 30 , Rosneft announced that it filed a joint bid with Exxon Mobil (NYSE: XOM ) for Mozambique license round. Mobile TeleSystems signed a binding agreement to acquire IT solutions provider NVision Group JSC for RUB 15 billion ($244 million). NVision is the developer and owner of TeleSystem’s billing system. This transaction should help the leading Russian telecommunications operator to improve its billing services, to offer complementary solutions to its clients and to reduce spending on in-house IT. Conclusion The Russian economy is under pressure of declining oil prices again. The low oil prices lead not only to weaker currency and lower GDP but also to lower RSX prices, as a significant part of RSX’s portfolio is created by shares of oil & natural gas producers. Although the June data indicated that the Russian economy may have reached its bottom , the recent oil price decline may prove this assumption to be incorrect. The decline of RSX should continue also in August, unless the oil prices start to recover. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

RSX: Bear Thesis In Progress

Summary The Greek drama and news that sanctions on Iran could be lifted put serious pressure on oil prices. The Ruble will continue to weaken. The Saudi deal does not impact the short thesis. I’ve recently written an article on the Market Vectors Russia ETF (NYSE: RSX ), where I outlined my bear thesis on the Russian market. The situation evolved fast. When the initial article was published, Brent oil was trading near $63. As I am writing this article, Brent oil trades at $57.50 after it touched $55.60. This was a spectacular movement, and I even got a message from a reader who was wondering whether it was time to buy RSX. The rationale of such thesis is quite simple – oil often rebounds after big moves. I think that this reader was not the only one wondering whether the plunge in oil was the opportunity to buy RSX at cheaper prices, so I decided to write a follow-up on my initial thesis. The Russian ruble – not as weak as I expected My initial thesis consisted of three main points: Russian ruble will weaken, the economy will continue to suffer and oil will drop. I will revisit them one by one. Since June 26, the ruble tumbled 4% against the dollar. The movement against the basket of currencies, which consists of dollar and euro, was more modest. I expected that ruble would be weaker. Many factors affect the value of the Russian currency, but the main factor is the price of oil. The oil price is the key variable for both the Russian economy and the Russian budget. It’s the price of oil in rubles that matters for the Russian budget. In the end of 2014, several Russian officials stated that the “comfortable” price of oil was 3600 rubles per barrel. However, as oil plunged and ruble tumbled, stabilization of the national currency became a top priority. Back in June 26, the oil price denominated in rubles was 3467. As I’m writing this article, the price of oil fell to 3277 rubles. In my initial article, I stated that the Russian budget was stretched. At the same time, the Russian Central Bank started to buy dollars at the open market to bring the country’s reserves back to $500 billion. I think that the price of oil in rubles will soon drift towards 3400-3500 level – either by forces of the market or with a little help from the Russian Central Bank. Even if oil prices stay at current levels, this will lead to further weakness of the ruble and put pressure on dollar-denominated RSX. The economy – deal with Saudi Arabia does not change the big picture Many readers already know that Saudi Arabia decided to invest up to $10 billion in Russia over the next five years. Some people speculate that some of this money could end up on the stock market. In my view, this will not be the case. What is important is the duration of the deal – five years, and the sectors – agriculture, medicine, logistics, retail and real estate. While the economy matters a lot when you buy a Russian market ETF, the fate of the actual holdings of this ETF matters more. The majority of the money will be spent on agricultural projects, and there is no agricultural producers in RSX’s holdings . Among related companies, Uralkali, the Russian producer of potash, accounts for just 2.02% of RSX’s holdings. All in all, I think that this news do not change the bear thesis. The oil plunge The Greek drama and news that sanctions on Iran could be lifted put serious pressure on oil prices. In my view, the story is far from its end. I think that oil still has room to fall, especially if the nuclear deal with Iran is successful. As I highlighted in my initial article, I believe that there is a structural imbalance between supply and demand. In my opinion, the strength of oil prices’ reaction to negative news confirms this thesis. Bottom line Let me guess your ultimate bullish argument: in a five-year period, Russian market will be higher as oil rebounds, sanctions are lifted and investors realize how cheap Russian stocks are. That may be true. However, a bearish thesis on a country is by definition not designed for five-year time frames. In shorter time frames, the bearish thesis remains valid. I expect that weaker ruble, poor economy and falling oil will continue to put pressure on RSX. Disclosure: I am/we are short RSX. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.