Low Growth Potential Of The Russian Market (BATS:RSX)


Instrument

The VanEck Vectors Russia ETF (BATS:RSX) is a fund that offers exposure to equities from Russia, which include publicly traded companies that are incorporated in Russia or that are incorporated outside of Russia, but have at least 50% of their revenues/related assets in Russia.

Source: VanEck

Analysis

The Russian Federal State Statistics Service has published macroeconomic data for April – the first month when the Russian economy experienced the full impact of the COVID-19 epidemic.

In April, the Russian retail turnover fell by 23.4% YoY:

This is of course an unprecedented result. But, firstly, we need to understand that because of quarantine measures, people in many cities simply were physically unable to make purchases. And secondly, a month earlier there was a jump in retail growth. Therefore, in April, we observed a rollback. In a word, nothing unexpected really happened. Now let’s look at the industrial production of the country.

In the last month, the Russian industry declined by 6.6% YoY:

It is worth noting that a decrease of around 20% was expected. Therefore, the actual result can be regarded as positive. But let’s look at the structure of this indicator:

As we can see, the growth rate of the mining industry, the basis of the Russian economy, was again negative. Within the bounds of the renewed agreement with OPEC+, Russia has undertaken to limit oil production from May to 9.5 million barrels. This means that in May the growth rate of the mining industry will be reduced by at least 10% YoY. Thus, despite the end of quarantine, the growth rate of the Russian industry will not recover in the coming months

According to the latest Markit research, the business activity in the Russian manufacturing industry fell to a multi-year low:

… New export orders contracted at a record rate, with a number of firms stating that clients had cancelled or postponed orders since emergency public health measures were put in place …

… Manufacturers registered a decrease in the degree of optimism towards the outlook for output over the coming 12 months …

… The decrease in employment was a stark turnaround from the broadly unchanged levels seen in March …

Bottom line

When it comes to the Russian stock market, you always have to remind yourself that this market is the cheapest in the world judging by the P/E multiple. Agree, it is difficult to expect that what is already the cheapest will become even cheaper.

Source

But let’s look at the situation a little deeper. Russia is one example of an economic phenomenon called the “Dutch disease“. For decades, Russia has focused on the development of the mining industry to the detriment of other sectors. Now, for a variety of reasons, cash flow from oil sales has fallen and the ruble has become significantly cheaper. Of course, this will help other export-oriented companies increase their sales. But their share is relatively small. And therefore, the overall situation will not improve significantly.

I don’t recommend to sell. But at the same time, I do not expect the RSX price to rise significantly in the coming months.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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