Russian equities have 35% upside down when the Ukraine crisis ‘de-escalates’. These 2 ETFs give you a way to play

Stock Market


To invest in Russia means to invest in oil and natural gas. And with demand for both increasing as the world economy recovers from the coronavirus pandemic, a play about Russia could serve investors well, despite the ongoing conflict over Ukraine.

Russian equities have retreated significantly over the past three months, but the decline is almost entirely based on investor sentiment – earnings forecasts have barely waned. Considering the long-term nature of conflict between Russia and Ukraine, and how tensions have settled in the past, this could be an excellent buying point for investors with an appetite for risk.

Below is information on two exchange traded funds that track Russia’s stock market in different ways, along with screens of the largest holdings of each.

The setup

Analysts at Pictet Wealth Management led by Julian Holtz wrote in a January 27 report that based on previous conflicts involving Russia, including the 2014 annexation of Crimea (which has been part of Ukraine since Ukraine’s independence from the Soviet Union in 1991), “[a] scenario à la 2014 would henceforth imply limited single-digit disadvantage (8%). ”

Pictet Wealth Management is a unit of Pictet Group of Geneva, which at the end of 2020 had some $ 664 billion in assets under management, based on current exchange rates.

Holtz further wrote: “We can see significant upside potential for the MSCI Russia [Index] over a few months would realize a de-escalation scenario (~ 35% in USD terms).

Russia can be seen as an opaque market for most US investors. But an easy way to invest there is through the $ 473 million iShares MSCI Russia ETF ERUS,
which follows the MSCI Russia 25/50 index. Here’s how the exchange traded fund’s price has moved up to January 31 in the past year:

Fact sheet

From its intraday peak at $ 52.80 on October 26, ERUS was up 26% through January 31 to $ 38.95. Meanwhile, the price of ongoing forward-month contracts for Brent Crude Oil BRN00
increased 4% to $ 89.26 on January 31 from $ 85.65 at the close on October 26. At the same time, the consensus 2022 EPS estimate for ERUS, based on weighted total estimates among analysts polled by FactSet, increased slightly to $ 7.98 from $ 7.97.

Holtz wrote that the decline for the MSCI Russia index was “fully attributable to valuations, while high energy prices kept earnings expectations stable.”

He acknowledged currency risk as Russia could allow the rubble to depreciate, relative to the dollar, to defend its economy in the event of sharp sanctions. Again, he believes downward risk for the ruble is limited due to Russia’s structural surplus on the current account (which should continue to increase due to the high oil price and a weak ruble), its low government debt and high foreign exchange reserves as well as the Bank of Russia’s credibility. “

As if to underline the importance of Russia as a supplier of fuel to Europe, the Moscow Times reported on Tuesday that Gazprom PSJC RU: GAZP
doubled its Ukraine natural gas pipeline capacity in January.

Screening of Russian shares

Russia’s economy and stock market are dominated by oil and natural gas production and exports. And the iShares MSCI Russia ETF is highly concentrated, with the top five holdings making up 56% of the 26-share portfolio. FactSet explains that this concentration gives market-like exposure to Russia, as it is “incredibly top heavy”. Five of ERUS’s top 10 interests are oil and / or natural gas companies, which make up 47% of the portfolio.

Another major ETF with a different approach to the Russian market is the $ 1.2 billion VanEck Russia ETF RSX.
It holds 29 stocks and is much less concentrated, with the top five holding making up 37.5% of the portfolio. According to FactSet, RSX “does not necessarily look like the broad Russian stock space” due to its greater diversification and limitation on exposure to the energy industry. Then again, among its top 10 interests are five oil and / or natural gas companies, which make up 35% of the portfolio.

Here is a chart comparing the two ETFs, which shows a similar pattern but better performance for ERUS over the past five years to 31 January:

Fact sheet

Most of the shares held by ERUS are traded locally, while most held by RSX are US Depositary Receipts (ADRs) or Global Deposit Receipts (DDRs) traded in the UK or US.

The following are lists of the top 10 interests of each ETF, along with summaries of opinions among analysts polled by FactSet. Stock prices are in locally traded currencies.

First, here are the top 10 interests of the iShares MSCI Russia ETF (ERUS):

Company

Typist

Part of ERUS portfolio

Share “buy” ratings

Closing price – 31 January

Disadvantages. price target

Implied 12-month upside potential

Gazprom PSJC

RU: GAZP

19.8%

94%

334.80

504.95

51%

Lukoil PJSC

RU: LKOH

14.3%

87%

6 878.00

8 603.92

25%

Sberbank Russia

RU: SBER

11.9%

94%

264.50

430.25

63%

Norilsk Nickel Mining & Metallurgical Co.

RU: GMKN

5.3%

36%

21 916.00

25 831.21

18%

Novatek JSC DDR

UK: NVTK

4.9%

67%

209.90

277.98

32%

Tatneft PJSC

RU: TATN

4.3%

69%

499.70

701.42

40%

TCS Group Holding PLC DDR

UK: TCS

3.9%

53%

71.20

93.20

31%

Rosneft Oil Co.

RU: ROSN

3.6%

79%

576.95

795,62

38%

Yandex NV Class A

YNDX

3.1%

100%

48.06

84.91

77%

Polyus PJSC

PLZL-RU

2.6%

55%

12 230.00

16 884.18

38%

Source: FactSet

On the above list of ERUS’s top interests, all the shares are traded locally in Russia, except the two GDRs traded in the UK (as indicated by the “UK:” in the tickers) and Yandex NV YNDX,
listed in the US

And here are the top 10 interests of the VanEck Russia ETF (RSX):

Company

Typist

Part of RSX portfolio

Share “buy” ratings

Closing price – 31 January

Disadvantages. price target

Implied 12-month upside potential

Gazprom PJSC ADR

UK: OGZD

8.5%

100%

8.63

13.27

54%

Lukoil PJSC ADR

LUKOY

8.0%

86%

88.87

113.62

28%

Sberbank Russia PJSC ADR

SBRCY

7.6%

NVT

13.67

NVT

NVT

Novatek JSC DDR

UK: NVTK

6.8%

67%

209.90

277.98

32%

Norilsk Nickel Mining & Metallurgical Co. ADR

UK: MNOD

6.6%

40%

28.12

34.04

21%

Tatneft DDR PJSC

VK: ATAD

6.1%

69%

38.38

57.26

49%

Rosneft Oil Co. DDR

UK: ROSN

5.4%

85%

7.41

10.81

46%

TCS Group Holding PLC DDR

UK: TCS

4.3%

53%

71.20

93.20

31%

Polyus PJSC DDR

UK: PLZL

3.9%

55%

78.00

111.69

43%

Polymetal International PLC

UK: POLY

3.5%

72%

10.61

16.57

56%

Source: FactSet

Click on the tickers for more about each company.

Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.

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