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Over the last two days, the VanEck Vectors Russia ETF (NYSEARCA:RSX) (a fund that offers exposure to equities from Russia) has been consolidating around $23.5, reflecting the attempts of the Russian stock market to reach a new high. Let’s evaluate whether it is a good idea to buy now.
According to the final data in Q1, Russia’s GDP grew by 0.5% YoY, showing the worst result of the last four quarters:
But the dynamics of forecasts are even worse than these figures. Thus, in June, the Central Bank of the Russian Federation lowered the expected range of Russia’s GDP growth rate in the current year from 1.2-1.7% to 1-1.5%. A similar forecast made by Fitch Ratings has been lowered from 1.5% to 1.2%. And the World Bank has lowered the forecast for Russia’s GDP growth rate twice in 2019: in April from 1.5% to 1.4%, and then in June to 1.2%. As you see, no one, including the Central Bank of Russia, expects GDP to grow by more than 1.5% this year, which is considerably worse than last year’s result. Nothing demoralizes business and investors more than the lack of a positive outlook.
The growth of industrial production in Russia in May fell to 0.9% YoY, which has been the worst result since December 2017:
The structure of the index has recorded a decrease in the growth rates of practically all components. The growth rate of the mining industry, the basis of the Russian economy, fell to a two-year low. This is a direct echo of Russia’s participation in the OPEC + deal that limits the level of oil production.
There are some more alarming figures. So, over the last 6 months there has been practically no increase in the volume of construction in Russia. And this indicator is always a marker of long-term confidence of businesses in stability.
In May the Russian manufacturing PMI fell below the critical 50-point mark that indicates a decline in manufacturing. Here is an extract from the comments on this study:
The contraction was driven by a faster decline in employment and softer expansions in output and new orders. New business growth eased further from March’s recent high, as new export orders fell for the fourth time in the last five months.
Source: MARKIT
So, judging by the dynamics of industry, Russia is gradually slipping into recession.
Now let’s look at the retail sector of the Russian economy.
In May, the Russian retail turnover slowed down to a three-year low of 1.6% YoY. This is a consequence of the continuing decline in consumer demand in Russia.
In May, the dynamics of growth rates of real and nominal wages in the Russian Federation again reverted to decline:
At the same time I want to remind that real disposable incomes of the population in Russia have been steadily declining for the second year running:
The latter is especially alarming in consideration of the observed “boom” of consumer lending in Russia: now 47% of Russians have two or more unpaid loans, and the payment peak will be next year. If the economy and consequently the incomes of the population do not grow, where will people take money to pay them off?
Bottom line
The price of the RSX is tied to shares of Russian companies and the dynamics of macroeconomic indicators in Russia creates the background for the dynamics of the RSX price. And this background became worse at the moment when the RSX price reached its annual maximum:
I recommend paying special attention to the results of the meeting of the OPEC+ participants scheduled for the beginning of July. If Russia agrees to cut oil production in the second half of the year, this will hardly leave any chances for the Russian economy to grow, and then it will be very difficult for the RSX to keep moving upwards.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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