Proprietary Data Insights
Financial Pros Top Russian Stock or ETF Searches This Month
Understanding Russia’s Stock Market
Not too many of you invest in Russia. In fact, there are less than a dozen tradeable companies listed on American exchanges.
Most of us use ETFs to trade the Russian markets.
And there might be an opportunity here.
Russia’s economy is heavily dependent on energy prices and exports.
As you might imagine, they aren’t doing so hot under the current circumstances.
Yet they have looked far worse than right now.
The VanEck Vectors Russia ETF (RSX) does a good job of depicting Russia’s overall stock market.
This monthly chart draws out the movement of the ETF over the last 12 years.
Russia’s market was in far worse shape when oil prices hit the skids back in 2014. It’s seen a remarkable recovery on the back of higher crude prices.
Yet, the current geopolitical conflict has cut off a 3rd of its value.
Chances are the war will end and things will return to some semblance of normalcy.
Should energy prices remain elevated, Russian equities are extremely cheap.
The downside here is a conflict that spins into some global war. Should that happen, all equity markets are headed lower. But that’s very unlikely to happen.
That’s why this creates a nice opportunity to mitigate downside risk while taking on exposure to higher Russian equity prices should the conflict resolve itself.
From Russia With Love
Conflict in Ukraine is all but a certainty now.
Yet, history says markets may not care.
2014 – Crimea
8 years ago, a political revolution gripped Ukraine.
After refusing to sign an agreement with the EU, large scale protests swept across the country in late 2013.
President Viktor Yanukovych was ousted on February 21, 2014, sparking demonstrations against the new interim government.
Russian forces rolled into the country on February 27, 2014.
Prior to the invasion, the S&P 500 had dropped 5.7% from the start of the year to the first days of February. From there, it climbed unabated for the rest of the year.
2008 – Georgia
In April 2008, Russia became involved with its southern neighbor Georgia.
By early August, the conflict exploded into full blown hostilities.
Despite the Great Recession, the S&P 500 remained flat between April and late June of 2008. However, it did begin to fall apart by the end of June as markets entered the depths of the banking crisis.
Where it Matters
Energy markets have already priced in the conflict as news from the weekend didn’t send crude or natural gas prices soaring.
Europeans face tough decisions. Germany halted the Nord Stream 2 pipeline. Italy initially backed away from energy sanctions given it imports nearly all its natural gas from Russia.
With cold winters drifting across Europe, people face higher prices to heat their homes.
Yet, that could quickly change.
Markets expect conflict. Anything that resolves these issues could break the back of energy speculators sending commodity prices plummeting.
On the flip side, prolonged sanctions against Russia exacerbate the energy supply and demand imbalance. However, that seems unlikely given the roundabout way energy could travel.
Europe could stop taking Russian energy, while China might import more. In turn, China could import less from Australia and other nations, and so on.
The Bottom Line: History says stocks will shake off any actual conflict. Typically, it’s the rumors that cause turmoil.
However, this particular situation creates a lot of uncertainty for energy names, especially those tied to natural gas like Cheniere (LNG) and Exxon Mobil (XOM).
As these stocks rise, prudent investors often sell a portion of their position to lock in some profits since no one can say for certain where and when the top will happen.
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