Russia is the “Trump Trade’ in the emerging markets. If there is one country seen benefiting from political risk from Washington, it’s Russia. The two alpha-males — president elect Donald Trump and Vladimir Putin — see eye to eye on knocking out ISIS in Syria. Trump is also on the fence on blaming Russia for Ukraine’s civil unrest in the eastern cities near the border, which has led to sanctions. The U.S. will likely keep sanctions in place in December — meaning they are there for another year unless Trump over-rules them in January. And the European Union is likely to keep them in place until July. But no doubt about it, a Trump presidency will have markets pricing in the end of sanctions on Russian energy and financials.
The Market Vectors Russia (RSX) exchange traded fund is up 4.5% since Nov. 9, beating the S&P 500 and the MSCI Emerging Markets Index. Emerging Markets are in the gutter as investors figure a strong dollar is bad for countries like Brazil and Mexico.
Russia’s economy is expected to come out of recession next year, even if oil stays in the $40s.
“Russia’s recovery is actually pretty impressive,” says James Barrineau, a fixed income fund manager with Schroders in New York.
The Russian Trump Trade is good for sanction relief, but also could make Russian soveriegn bonds more attractive as well. Most of the new issues of Russian debt was already being acquired by American firms, according to operators at VTB Capital. But any sentiment shift would make Russian debt attractive, especially in times of volatility when bond prices fall and investors use that as a way in.
There are some risks in this trade because no one knows who Trump will choose as Secretary of State. Potential frontrunnner Mitt Romney is a known Russian hawk.
“The Russian equity rally to date has been a derivative of the bond trade rather than being an outright bet on growth,” says Daniel Salter, an equity strategist for Russian-owned Renaissance Capital in London. “The market has been able to absorb the arrest of economy minister Alexey Ulyukayev, but a wider investigation spilling in to the finance ministry would be taken negatively,” he says.
Ulyukayev has come under pressure for allegedly receiving bribes.
Investors tend to complicate Russia. It’s only resource of note is oil and gas. The country has just gone through the worst shock since the fall of the Soviet Union: the oil market crash, sanctions, and fervent anti-Russian bias in the Western world that destroyed a lot of investor sentiment.
The OPEC production cut is unlikely. So oil is more bearish than bullish. A strong dollar bias, however temporary that may be, is also no good for oil.
Yet, Russian securities are surviving this. Imagine what Russia looks like when sanctions lift and oil prices rise again?
“Odds are good for Putin and that’s good for Russia,” says Ashmore Group’s head of research, Jan Dehn. “You buy Russia when it’s oversold and if the yield and carry-trade makes its debt attractive. That’s the only reason why you buy it. It doesn’t have to be complicated.”
The last week has made Russia too hot to handle. Investors may want to sit this one one until the two big ETFs settle down a bit.