Analyse: iShares MSCI Russia ADR/GDR

Korruption, schwächelndes Wachstum, marode Infrastruktur: Die Probleme in Russland sind manigfaltig. Aber der schwache Rubel und die tief gefallenen Kurse machen den Aktienmarkt für Value-Investoren interessant. 

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Rolle im Portfolio

The iShares MSCI Russia ADR/GDR provides equity exposure to Russia. As with all single country emerging market exposures, this iShares ETF would be best deployed as tactical tool within a well-diversified portfolio. The ETF can also be deployed as a core holding complementing exposure to emerging markets in Asian and Latin America. Moderate correlation with international stock markets offers some diversification benefits to the portfolio. The MSCI Russia correlated 85% with the MSCI World Index and 84% with the MSCI Europe Index over the last three years.

Investors should keep in mind though that Russia has been the most volatile of the emerging markets. The MSCI Russia fell almost 75% in 2008, and subsequently gained 100% the following year. This can be partly explained by fluctuations in the price of oil, which plummeted 54% in 2008 and leapt by 79% in 2009. The MSCI Russia had a standard deviation of 23.1% over the last three years compared to 17.5% for the MSCI EM Latin America Index and 14.5% for the MSCI EM Asia Index.

Before considering an investment, investors should review their portfolio for existing exposure to both the energy sector and Russian equities (for instance, Russian equities account for approximately 6% of the value of the MSCI Emerging Markets Index) to avoid unintentionally over weighting this region and sector, respectively.

For tactical purposes, this ETF is most suitable for investors either with a bullish view on oil--and energy prices in general--given the benchmark’s high correlation (0.73) to oil over the last five years or for investors believing that Russian stocks are generally undervalued.

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Fundamentale Analyse

Russian equities continue to trade at a discount to shares in other emerging markets. This persistent discount can be partly explained by rampant corruption and state interference within Russia. These are key risk factors for Russian companies; hence investors demand higher risk premiums. The government’s share in the Russian economy is estimated at about 50%.

The Russian economy is heavily dependent on energy prices as about half of its annual income comes from oil and gas revenues. In fact, it is estimated that the nation’s budget is now only balanced if the oil price is around $120 per barrel, up from a level of $50 per barrel in 2008. The government forecasts an average oil price of $104 per barrel for 2014. Over the last decade, oil revenues have been used to fund increases in social spending, helping many pensioners and state employees to escape poverty. By the same token, Russia struggles whenever export demand for oil and other commodities falls. The OECD argues that Russia should go down the path of structural reforms in order minimise this dependency on oil revenues to fund social spending. For example, it has advised the government to increase women’s retirement age in order to free up capital and limit age-related expenditure.

Recent economic data paint a negative picture for the Russian economy. Industrial output dropped 1.0% m/m in November after a 0.1% fall in October. Over the same period, exports dropped by 5% and 5.6%, respectively. Economists expect GDP growth of 1.4% for 2013, significantly down from the 3.2% forecast at the beginning of the year. The consensus forecast for 2014 is for GDP to grow by 2.0%, whereas the government is a little bit more optimistic and sees the economy expanding by 2.5%.  

Overall, the economy continues to struggle, with further reforms needed to bolster future growth, improve the business climate and strengthen innovation, according to the latest OECD Economic Survey of Russia. The reports emphasises the need to become less dependent on commodity prices, in particular oil, while increasing productivity and better matching job skills.

Russia struggles to live up to its full growth potential as poor governance and rule of law issues weigh on investors sentiment. Foreign investors continue to withdraw money while Russian companies hesitate to make big investments due to concerns of political freedom. As a result, there hasn’t been any growth in tangible investments in 2013, according to some analysts. However, some windfall from Russia’s oil revenue funds on infrastructure is expected for 2014.

Elsewhere, inflation risk continues to be a risk factor. However, it is unlikely that Russia’s central bank will cut rates to boost the economy before Q2 2014. The bank argues that a rate cut could spur inflation while doing nothing to boost output or create jobs. As we write, inflation is at 6.4%, slightly above the target rate of 5%-6%.

All things considered, it seems fair to say that until adequate policy steps are taken by the government and corruption is effectively tackled, Russian equities should be expected to continue trading at a big discount to other Emerging Markets.

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The reference index is based on the MSCI Russia Index. The index is a free float-adjusted market capitalisation weighted index and reflects the performance of 85% of the Russian investible equity universe, subject to a global minimum size requirement. In addition, the MSCI Russia ADR/GDR Index excludes all constituents without liquid depositary receipts listings. The index is rebalanced quarterly and calculated in US Dollars on an end of day basis. The composition of the underlying economy leads to an index heavily biased towards the energy sector (55% of the index’s value), followed by financials (19%) and materials (8%). The index is very top heavy, with the top five constituents representing over 60% of the index’s value.

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This ETF uses physical replication techniques to track the performance of the MSCI Russia ADR/GDR Index. The fund holds all the constituents of the index. iShares may engage in securities lending within this fund to generate additional revenues for the fund. The lending revenues generated from this activity are split 60/40 between the fund and the lending agent BlackRock, whereby BlackRock covers the costs involved. To protect the fund from a borrower’s default, BlackRock takes collateral greater than the loan value. Collateral levels vary from 102.5% to 112% of the value of securities on loan, depending on the assets provided by the borrower as collateral. Additional counterparty risk mitigation measures include borrower default indemnification. Specifically, BlackRock commits to replace the securities that a borrower would fail to return. The indemnification arrangement is subject to changes, and in some cases without notice. Finally, BackRock limits the amount of assets that can be lent out by this ETF at 50%.Cash received as dividends from the underlying stocks is held in the fund’s income account until it is distributed to fund holders. Distributions are made on a quarterly basis. This dividend treatment can potentially create a drag on returns in upward trending markets as dividends are not reinvested into the fund. In practice this cuts both ways. It could also result in outperformance if the benchmark falls in the interim period.

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The fund levies a total expense ratio of 0.65%. This falls at the middle of the range for ETFs tracking Russian equities. Other costs potentially borne by the shareholder but not included in the total expense ratio include bid-ask spreads and brokerage fees.

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At the time of this writing, there are quite a few ETFs offering exposure to the Russian equity market. At the moment the largest ETF tracking Russian equities is the Lyxor ETF Russia (DJ Russia GDR), which tracks the DJ Russia GDR Index. At 52% of the index’s value, the fund has a comparable exposure to the energy sector. The Lyxor ETF also levies a total expense ratio of 0.65%.

Moreover, HSBC offers the HSBC MSCI Russia Capped Index. The fund uses physical replication to track its Russian equity benchmark. The fund levies a total expense ratio (TER) of 0.60% and is denominated in U.S. dollars.

The ETF offering the most diversified exposure to Russian equities available is the RBS Market Access DAXglobal Russia Index ETF. The index includes 30 Russian stocks, chosen with an emphasis on size and liquidity. The greater degree of diversification comes mostly from a smaller cap on maximum component weighting of 10%. The ETF levies a TER 0.65%.

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Über den Autor

Gordon Rose, CIIA, CAIA,

Gordon Rose, CIIA, CAIA,  war von 2011 bis 2014 Fondsanalyst bei Morningstar.