Finding emerging markets that are trading at discounted
valuations is not hard these days. China, India, South Korea and
other emerging markets are trading at discounted valuations. And
yes, per usual, so is Russia.
Russia, the world's largest oil producer, is home to some of
the most profitable companies in the developing world, yet the
market typically trades at a discount to the broader emerging
markets universe. The "Russia is cheap" theme took on an added
significance earlier this year when it became apparent that
Russian stocks were not just cheap compared to China or Brazil,
but also deeply discounted relative to Russia's own history of
Russia ETFs Still Sporting Cheap Valuations
"Since mid-June, Russia has displayed some relatively strong
performance compared to its emerging market peers. We believe
this rally was underpinned by attractive Russian equity
valuations, but we also note that the performance coincided with
a recent rise in U.S. interest rates,"
said WisdomTree Research Director Jeremy Schwartz
in a note
Schwartz is correct in noting that Russia ETFs have been
sturdy compared to other emerging markets funds. Among the major
BRIC ETFs, only the iShares China Large-Cap ETF (NYSE:
) has outpaced the Market Vectors Russia ETF (NYSE:
) year-to-date and over the past three months.
"The recent rally in Russian equities is testimony to the
ability of its local markets to thrive in an environment of
rising U.S. bond yields," said Schwartz. "With an encouraging
second-quarter gross domestic product out of the U.S. and a
sanguine July Federal Open Market Committee (FOMC) outlook,
markets are widely anticipating tapering to occur as early as the
fourth quarter this year. While policy rates will remain
accommodative for a longer period, steady improvements in the
U.S. economy may result in a further increase in treasury
One potential bright spot for Russia, at least for patient
investors with longer-term time frames, is the country's growing
dividend footprint. While there have been struggles on the road
to President Vladimir Putin's plan to force state-controlled
companies to pay 25 percent of net income in dividends, Russia is
the fastest-growing and second-largest dividend payer overall
in the WisdomTree Emerging Markets Equity Income
That is the underlying index for the $4.8 billion WisdomTree
Emerging Markets Equity Income Fund (NYSE:
). DEM has an almost 19 percent allocation to Russia, more than
triple that of the iShares MSCI Emerging Markets ETF (NYSE:
The newly minted WisdomTree Emerging Markets Dividend Growth
) also features a healthy Russia allocation of nearly 11.4
percent, well above the average weight to the country found among
established, diversified emerging markets ETFs.
"The EM block has experienced outflows, partly due to the
narrowing yield gap between the U.S. and the rest of the emerging
markets. The closing of this gap renders the EM block less
compelling from a yield perspective. However, we feel that Russia
is well positioned to withstand the storm, as it is less reliant
on external funding and thus better able to keep its monetary
policy loose (i.e., low interest rates), while other EM nations
tighten their monetary policy-which can slow down their
economies-in order to attract foreign flows," said Schwartz.
For more on ETFs, click
Disclosure: Author is long DEM.
(c) 2013 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
Free Trading Education -
Check out the free events taking place on Marketfy
this week. Spaces are limited. Sign up today.