Russia ETF Goes From Star to Sloucher in Two Months as Oil Sinks

  • Market Vectors fund goes from best performer to trailing 122
  • Performance lags as crude trades at lowest price since 2004

What a difference two months can make.

The Market Vectors Russia ETF has gone from being the best-performer among almost 800 U.S. exchange-traded funds in October to trailing 122 of them as crude plunged to a 11-year low. And with no end to the oil slump in sight, investors are bracing for even further losses in the energy-heavy fund.

Russia, the world’s largest energy exporter, is beset by its first recession since 2009 as international sanctions tied to the Ukraine conflict worsens the impact of the plunge in crude. Central bank policy makers this month lowered the threshold for what they consider a “risk scenario” for the economy to $35 a barrel. Prices at that level would cause a decline of as much as 3 percent in gross domestic product next year, they estimate. Brent crude sank to $36.15 on Monday, the lowest since 2004.

“Russia’s stress scenario is already in play as Brent is nearing $35 a barrel and more stress is probably coming to the Russian economy,” Tomasz Noetzel, an analyst at Bloomberg Intelligence, said by phone from London last week. “The speculation that the worst for Russia is over is a little premature.”

November Outflow

The Market Vectors ETF, more than 40 percent of which is invested in energy companies, traded at this year’s high of $20.83 in May as Brent crude sold for more than $65 a barrel. Traders pulled $26 million from it in November, the first net outflow in two months, as oil prices slid below $45. With few catalysts to drive oil prices higher as the U.S. raises interest rates and growth slows in China, foreign investors have little incentive to be exposed to Russian energy companies, said Oleg Popov, a money manager at the Moscow-based April Capital.

“For foreign investors, the Russian market is mainly about oil and gas,” Popov, who oversees about $500 million, said by phone last week. “As oil is declining and there are no signs of a rebound to be seen, investors are heading for the exits.”

Shares in the fund have declined 14 percent since Oct. 9, when it was the best performer among all U.S.-traded ETFs with assets of at least $100 million.

While some companies in the Market Vectors Russia ETF have soared in the past two months -- search engine Yandex NV has gained 17 percent -- shares of energy producers from Tatneft PJSC to Gazprom PJSC have plunged at least 17 percent. Short interest in the ETF rose to 7.1 percent of outstanding shares on Dec. 18 after dropping to a five-month low of 3 percent the prior week, data compiled by Bloomberg and Markit show.

The $35 oil price in the central bank’s worst-case economic scenario model compares with $40 in its March forecast and $60 a year ago.

Brent Plunge

Brent’s 19 percent collapse this month has exacerbated the impact of international sanctions, threatening to prolong the recession. Oil is trading below levels last seen during the global financial crisis on signs a record surplus will worsen. The ruble slumped 0.4 percent to 71.24 at 9:53 a.m. on Monday, on track for a record-low close.

For Ivan Manaenko, the head of research at Veles Capital LLC in Moscow, things in Russia can’t get much worse. Investors could find good values in the country if they’re patient and willing to wait for returns, he said.

“The majority of negative scenarios have materialized, and now might be not a bad time to buy Russian assets,” Manaenko said by phone last week. “Geopolitical factors remain highly unpredictable, but assuming things stay where they are, we are to see an improvement next year, though it will likely be rather slow.”

Fed Move

The Market Vectors Russia ETF added 0.5 percent to $15.03 last week. The fund has gained 2.2 percent this year, data compiled by Bloomberg show. Russia’s benchmark Micex Index trades at 6.1 times projected 12-month earnings, the cheapest among emerging-market peers, data compiled by Bloomberg show.

Investor sentiment on Russia soured further after the Federal Reserve increased interest rates for the first time in almost 10 years, damping demand for riskier assets, including Russia. The European Union started the process to approve the extensions of sanctions against Russia for six months an official who asked not to be identified because the action is private, said last week.

“With geopolitics, sanctions, slumping oil and a weak ruble, only brave-of-heart investors could be interested in the Russian market, and there aren’t too many of the brave ones left,” Sergei Pigarev, senior analyst at Rye, Man & Gor Securities, said by phone from Moscow last week.

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