Ukraine Truce Brings Emerging Europe ETFs in Focus

The past one year has been quite choppy for Russia equities ETFs as well as the emerging Europe ETFs. The stricter sanctions against Russia by the West following its Crimea annexation (previously a Ukrainian territory) spread jitters among investors about these investments.

While a ceasefire deal signed between Russia and Ukraine in early September cooled off the five-month long bloody conflict, the agreement failed to materialize as none of the concerned parties obeyed truce. Finally, after a year-long unrest, constant tussle between Russia and the West over the Ukrainian issue, and a series of economics bans, the presidents of Ukraine and Russian reached a consensus on February 12, 2015 to resolve the crisis.

Ukraine’s Petro Poroshenko and Russia’s Vladimir Putin met at Belarus in the presence of Germany’s Chancellor Angela Merkel and French President Francois Hollande to work out the ceasefire.

The global benchmarks ended in the green on Thursday as the Russia-Ukraine truce – enacted midnight February 15 – boosted investor confidence. The news has pushed up Russian equities as well as emerging Europe ETFs like SPDR S&P Emerging Europe (NYSE:GUR. The biggest Russia ETFs – MarketVectors TR Russia (NYSE:RSX), (MarketVectors Russia Small-Cap (NYSE:RSXJ) – added more than 2% on February 13.
Russian ETFs Had a Great Week

Among the EM Europe ETFs pack, Russian equities ETFs posted stellar gains last week, ended February 13, 2015. All exchange-traded products RSX, RSXJ,iShares MSCI Russia Capped Index (NYSE:ERUS) and SPDR S&P Russia (NYSE:RBL) have advanced in the range of 9.82% to 11.7% in the last five trading sessions (as of February 13, 2015).

However, the main driver of this surge appears to be the rebound in oil prices. Investors should note that a jump in oil prices on supply concerns in Libya and Kurdistan as well as spending cuts by the U.S. drillers went in favor of the Russian economy (read: Guide to Russia ETF Investing).

Since Russia is an oil-rich nation, the rebound did the trick in sending the stocks higher. Brent crude futures added more than 1% to $62.09 per barrel on February 16, 2015, almost an eight-week high, adding 38.5% from a six-year low seen in January.

Plus, Russian equities are trading at dirt cheap valuations with RSX having a P/E (ttm) of 5 times versus the biggest European ETF Vanguard MSCI EU (ARCA:VGK) P/E of 15 times. This indicates that a certain run-up was long due for the Russian Equities ETFs space.

Of course, the ceasefire talks also made a timely entry to the Russian market giving all key ETFs at least a 2% nudge on Friday. But the truce talks may not have been the sole cause of the spike.

How Are Emerging Europe ETFs Performing?

Several emerging European ETFs including GUR and MSCI Emerging Mrkt Eastern Europe (NYSE:ESR) have benefitted from the rally in the Russian stocks so far this year as both funds have half their total assets invested in Russia, though countries like Hungary and Czech Republic do take considerable share in these funds (read: Beyond Russia: How are Eastern Europe ETFs Performing?).

GUR, a $53 million ETF, puts about 44% assets in Russia followed by Turkey (22.5%), Poland (18.9%) and Greece (6.3%). Though the ETF saw a 2.52% gain on February 13, it seems that the gains mostly stemmed from the spike in Greek stocks. The ceasefire has offered less contribution in it.

This can further be validated from a just 0.1% gain in ESR, a $137 million ETF, having 67% allocation in Russia but no exposure in Greece. So far this year (as of February 13, 2015), ESR is up 12.2% and GUR is up 8.6% (read: Best and Worst Country ETFs for 2015).

Will the Ceasefire Hold Good?

At the time of writing, both nations seem less interested in seriously obeying the truce talks as the sounds of gunfire were loud on February 16 (after the enactment of ceasefire) and both Kiev and Kremlin blamed each other for infringements.

It seems that the latest round of peace talks will face the same fate as it did last September. Thus, we must not shift focus from the key causes of the conflict and closely monitor the heated movement. After all, an inability to maintain the deal will definitely pare YTD gains seen in the aforementioned ETFs in the coming days.

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