The Russian Market Is Losing Ground – VanEck Vectors Russia ETF (NYSEARCA:RSX)

Instrument

The VanEck Vectors Russia ETF (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

According to the latest official data, in October, the Russian retail turnover growth rate accelerated to 1.6% YOY (+0.7% YOY in September). It’s the best result in the last seven months.

At the same time, there was a slight increase in the growth rates of real and nominal wages.

However, it occurred primarily due to the lowering inflation, rather than raising salaries:

Russia Inflation Rate

So, most likely, the Russian domestic demand will increase in the coming quarters. And this will have a positive impact on the companies in the Russian retail sector. But, taking into consideration that such companies make up only a small part of the RSX’s portfolio, this plays a secondary role in this analysis.

Let’s look at the industrial production.

In October, the Russian industry grew by 2.6% YoY. It’s the worst result in the last five months.

The structure of the index has recorded a decrease in the growth rates of practically all components. The growth rate of the mining industry, the basis of the Russian economy, fell to a two-year low. I want to remind you that Russian energy companies form 43% of the RSX’s portfolio, and they are, in turn, mainly represented by oil companies.

In 2019, the growth rate of the mining industry in Russia tends to slow down, which is a direct consequence of participation in the OPEC+ deal.

Most likely on the next week’s meeting, OPEC will continue the cuts. It is particularly noteworthy that Russian oil companies proposed earlier to keep their output quotas unchanged. It means that most likely the “plaster” won’t be removed from the Russian oil industry. This is a negative sign for RSX.

In October, the seasonally adjusted IHS Markit Russia PMI signaled a further solid deterioration in operating conditions:

Here is an extract from the comments on this study:

… New export orders fall at fastest pace since 2009 …

… Further contractions in output and new orders led to reduced pressure on capacity and a drop in workforce numbers …

So, as you see, Russia is one step away from stagnation.

Bottom line

So, there is no reason for great optimism. Russia’s participation in the OPEC+ deal will restrain growth in the mining industry which accounts for a good half of the country’s total industry. And therefore now I see no fundamental reasons for the RSX growth.

Under such conditions, it is most likely that the RSX is in for a sideways trend in the near future.

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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