Russia may be weakening but just wait for the stimulus

The Market Vectors Russia ETF (RSX, quote) has erased gains for this year after having fallen by 25.2% over the last twelve months.

Image courtesy Klobetime: http://www.flickr.com/people/klobetime/

The main street of St. Petersburg: Neksky Prospekt

Despite a fairly resilient economic environment, the Russian market has underperformed both the iShares MSCI Emerging Markets Index (EEM, quote) and the S&P500 over the last year.

GDP growth in the first quarter surprised investors with a gain of 4.9% as consumers maintained their support on high oil prices and increased government spending ahead of the elections.

The economy has weakened slightly since the first quarter with both industrial production and fixed-asset investment declining significantly.

Despite an extremely weak export environment and falling oil prices, Russia has one thing going for it relative to other markets. The central bank maintained its refinancing rate at 8.0% for the fifth consecutive month even as global growth weakens and inflation falls to just 3.6% on an annualized basis.

Pricing pressures are well below the 6.1% pace set last year and are the lowest since the early 1990’s. This gives the monetary authorities a tremendous amount of room for stimulus should conditions further deteriorate.

While rates are also high in other BRIC markets like Brazil and India, quickening inflation may detract from economic performance.

Headline risks out of Europe and lower commodity prices may continue to push the index lower in the short-term, but investors should benefit from patience as the fund pays a dividend yield of 1.95% and trades around six times trailing earnings of stocks in the index.

Valuations are attractive versus that of around 13.5 times for the S&P500 and 10.0 times for companies in the broader emerging markets index.

Additionally, the market could still see a positive increase in sentiment leading up to a large sale of state assets expected in June of this year.

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