Signs of recovery?
Overall, it seems that Russia is recovering, but it’s still far from a home run bet. The mild growth and somewhat moderate inflation are positive in the sense that further monetary easing is a feasible option, so there could be some minor near-term upside.
Most of the opportunities will likely be on a company-by-company basis. However, the United States has outperformed and will likely continue to outperform the Russian market as a whole, as it has over the past two years.
An encouraging datapoint, though, is that the negative correlation with the U.S. market has turned positive, meaning that if the U.S. continues to recover, then Russia may feel some positive effects. Nonetheless, the correlation between the S&P500 and the Market Vectors Russia ETF (RSX) remains very low, at close to 20%. While this is better than a negative correlation, it’s still too low to celebrate any potential boost from upswings in the U.S. market.
High risks ahead
A point against an encouraging outlook, though, is that the Russian ruble remains weak, which is a big foreign exchange risk for international investors. With the reduced tensions in Syria, oil prices have contracted again, which hurts Russia as a big oil exporter.
It’s important as well to keep in mind that the PMI survey is relative versus the previous month. As long as producers report that conditions have improved, then the score may be high, but an improvement from a very poor condition to slightly less poor condition is still unattractive for investors.
Given the PMI survey as well as other macroeconomic data, it seems that Russia will continue a mediocre growth path in the short to medium term and that downside risks heavily outweigh risks to the upside.