By Todd Shriber
In news that could surprise some market observers, the Market Vectors Russia ETF (NYSEArca: RSX) climbed 2.3% last week while the MSCI Emerging Markets Index rose just 1%. It also feels as though RSX’s 5.3% over the past month has been kept quiet.
RSX’s recent turn for the better comes as the United States Brent Oil Fund (NYSEArca: BNO) has tumbled 18.4% over the past 30 days and amid a spate of challenging headlines for the Russian economy. Recent sturdiness in RSX, though it cannot be glossed over that the ETF is down 42.4% over the past year, could be a sign that some investors believe the worst is priced into Russian stocks and that valuations that are among the lowest in the emerging world are too compelling to ignore. [Russia ETFs try to Rebound]
For example, RSX, the largest and most heavily traded Russia ETF, jumped 3.4% last Friday, a day after index provider MSCI (NYSE: MSCI) said it will defer the potential inclusion of Russian companies with primary listings in foreign markets until further notice because investors expressed concern about changes to MSCI Russia indexes in the current environment.
The iShares MSCI Russia Capped ETF (NYSEArca: ERUS), which tracks a MSCI index, also gained 3.4% last Friday.
That was before Moody’s Investors Service lowered its rating on Russian sovereign debt to one notch to Baa3 from Baa2. The Baa3 rating is the lowest investment grade on the Moody’s scale. In a statement, Moody’s said what many market participants were already speculating about: Russia’s investment-grade rating is fragile, but that may not imperil RSX, ERUS and other Russia ETFs.
Consider this: Russia ETFs traded higher last week, the week after Fitch Ratings lowered Russia’s sovereign credit rating to BBB-, the lowest investment grade, with a negative outlook. Fitch previously rated Russian sovereign debt BBB. [Russia ETFs Fall After Fitch Downgrade]
Additionally, RSX has traded higher over the past month and it was about one month ago that Standard & Poor’s placed Russia’s sovereign debt on CreditWatch with negative implications, indicating Russia could lost its already tenuous grasp on its investment-grade credit rating.
S&P’s move to put Russia on CreditWatch negative reflects the ratings agency’s “view that there is at least a one-in-two likelihood of a negative rating action within 90 days,” according to S&P.
While it is easy to speculate about Russia’s default odds at a time when ratings agencies are taking a knife to the country’s credit rating, some market observers see the chances of another Russian default as slim.
“Russia’s current foreign debt is not large: $731 billion, or about 34% of Russia’s annual GDP. Direct government debt is $73 billion and state-owned banks and corporations owe an additional $304 billion. By international standards this is benign. U.S. external debt is close to 100% of GDP, for example. In consideration of Russia’s $478 billion currency reserves, accumulated over the past decade, it seems absurd to worry about default,” said Research Affiliates in a note out earlier this month.
Market Vectors Russia ETF
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