Name That Trade $RSX – From Russia With NO Love

by Enis March 4, 2014 11:33 am • Commentary

The Russia hate has been piling on pretty hard over the past week.  Russia and Mr. Putin have over the news headlines after the Ukraine invasion.  Along with it, Russian markets have tanked and the Russian Ruble has traded at an all-time low vs. the U.S. dollar.

Russian stocks were down almost 10% on yesterday’s gap lower.  Many have been using RSX as a proxy for Russian stocks (an ETF that tracks Russian stocks, which is the easiest way to access Russian stocks in the U.S), which did break multi-year support yesterday (more on that in yesterday’s Macro Wrap).  However, the underlying Micex Index did not actually break below its 5 year support on yesterday’s price action:

Micex Index monthly chart, volume lower panel, Courtesy of Bloomberg
Micex Index monthly chart, volume lower panel, Courtesy of Bloomberg

The 1200-1225 level is the support spot from which the index has bounced on multiple occasions over the past 5 years.  The low yesterday was around 1260, and the index is back up around 1350 today.  Volume over the past 6 months has been the highest since 2009.

The reason that the RSX is down more than the Micex is that the ETF includes the exposure to the Russian Ruble, which hit an all-time low yesterday vs. the USD.  Nonetheless, if we are simply looking at the technicals of the underlying index, the Russian index looks to be holding support so far.  

Russia’s invasion has introduced serious potential risks for Russian stocks, including potential international sanctions, further weakness in the Ruble, higher rates and more expensive credit (the central bank raised the rate yesterday by 1.5% in an emergency move), and a broad loss of confidence in Russian stability.  Yesterday’s 10% drop in the market was investors’ first attempt to price in those risks.  Given the uncertainty and fluidity of the situation (for example, see today’s news), it’s a hazy attempt at best.

While I have no immediate interest in RSX, I wanted to lay out the overall situation since the Russian equity market is so darn cheap.  Much of the Russian equity market is energy or commodity related (Gazprom – natural gas, Novatek – natural gas, Lukoil, and Norilsk Nickel are 4 of the largest components), which is part of the reason why the market has lagged over the last few yeas, as commodities have been weak.

Meb Faber is a terrific blogger and value investor who has illustrated the advantage of buying into cheap equity markets in the long run.  He looks at trailing 10 year earnings vs. the market’s current valuation to assess long run attractiveness of a region’s equity markets.  Here was his analysis of 2013:

Did CAPE work in 2013?  Below are end of 2012 updates, new CAPE values mailed to Idea Farm today…Also below is a chart of average and median CAPE values across 55 markets over time… – See more at:

Screen Shot 2014-03-04 at 9.30.11 AM


2013 was actually a year where value investors did much better than growth investors with two big exceptions – the U.S. on the upside and Russia on the downside.  After Russia’s poor start to 2014, it is now the second cheapest country in the world after Greece.

Cheap valuation by itself is no reason to jump into a country’s stock market.  In fact, Egypt and Greece both got much cheaper after their respective crises.  Egyptian stocks declined about 50% from the time of the initial fall of Mubarak to their ultimate bottom last year:

[caption id="attachment_37071" align="alignnone" width="600"]EGPT weekly, Courtesy of Bloomberg EGPT weekly, Courtesy of Bloomberg[/caption]

It took about two years for Egyptian stocks to eventually find a bottom (on the news of the ouster of Mursi last summer).

Another market that got pummeled due to country-specific developments over the past few years was Greece.  The Greek protests really got going in May 2010 after the Greek parliament passed an austerity bill.  That’s when the Greek market first saw heavy-volume selling:

[caption id="attachment_37072" align="alignnone" width="600"]Global X FTSE Greece 20 ETF weekly chart (GREK), Courtesy of Bloomberg Global X FTSE Greece 20 ETF weekly chart (GREK), Courtesy of Bloomberg[/caption]

Greek stocks fell another 65% after the initial selloff in May/June 2010 before bottoming about 2 years later in mid-2012.

These are both examples that a cheap stock market can certainly get cheaper, particularly when political risks are elevated.  I would be in no rush to jump into Russian stocks despite their cheap valuations given the significant stability issues with Putin at the helm.  But tap me on the shoulder in a year or two if the market is down 25-50%, and I might be interested no matter the headlines.