Buying Russian Growth

| July 20, 2011 | 0 Comments

Where can you go these days to find growth?  It seems every region of the world is experiencing some kind of crisis!  And if they’re not… their trade partners are.

It’s a tough global economy and it’s getting tougher to decipher where to go next.

So, after the recent selloff, should you invest in Europe?

Not a chance.  While Germany seems to have their economy and debt in order, they’re at the mercy of EU countries for survival.  If the worst comes to pass and the EU breaks up, or a member pulls out… how will anyone pay for Germany’s goods?  Or what currency will they use?  It’ll be a mess for sure…

How about the good ol’ USA?

Economic data coming from the government is still confusing.  One day we get strong retail sales and the next we learn producer prices are falling.  Even worse, unemployment is still over 9%.  It’s tough to grow a consumer based economy with that many people unemployed.

On top of all that, the already beat-down US housing market could still head lower.  At least if you’re reading the latest S&P Case Schiller report…

All in all, it’s a pretty weak investment picture out there right now.

But I’ve found one Eastern country that’s poised for steady growth… Russia!

Russia has shocked the world by surviving the violently chaotic conversion from a communist society to a capitalist economy.  And while still not perfect, Russia is taking advantage of their vast resources to maximize their growth… namely oil and gas.

During the recent commodities boom, Russia has seen its GDP grow to over $2 trillion.

What’s even more amazing is after the already massive growth, Russia GDP growth is slated to jump another 4.6% in 2011.

In the process, they’re seeing their currency rise as a result of interest rate hikes.  These rate hikes are designed to control inflation.

You see, price inflation in Russia is at 9.7% right now.  And while it sounds like a big number, that’s well below the dangerous double digit levels seen in years past.

More importantly, Russian inflation is gradually cooling.  The goal of the Russian central bank, Bank Rossii, is to contain inflation at 6-7%.

Here’s my favorite part…

To control the inflation without driving the Ruble through the roof, the central bank is using “macro prudential measures” to assist in controlling inflation.  And not just rolling out interest rates hikes.

Let me explain…

Macro prudential measures are basically the new label for monetary policy where the central bank attempts to curb inflation without raising interest rates.

The most popular of these measures is raising bank reserve ratios.  The logic is increasing reserve ratios will result in less lending.  And if banks are lending less, growth and inflation will slow as a result… without requiring an interest rate hike.

Pretty slick, huh?

Russia’s trying to avoid another interest rates hike.  Their interest rate is already a whopping 8.25%.

Raising rates again will send their currency even higher, leaving them with a trade disadvantage on the global markets.  The Ruble is already trading near record highs against the US Dollar.

And since Russia is primarily an export economy, a trade disadvantage is the last thing they want!

Speaking of exports, Russia is an export leader.  And that’s why their future is bright.  Their list of exports is long but mostly focuses on commodities like oil, natural gas, metals, and coal.

But just don’t think they’re tied exclusively to commodities…

Russia is a R&D hotbed for some of the world’s largest tech companies including Intel, Motorola, Sun Microsystems, and Boeing!  They even export quite a bit of military equipment, aircraft, communications equipment, and even space vehicles.

It looks like all those years of cold war preparation haven’t gone to waste and are now being monetized!

So how can we take advantage of Russia’s massive growth and crafty economic policy?

I recommend buying shares of an ETF.  This way you can capture all the benefits of the growing Russian economy… versus just buying shares in a single company.

One of the top Russian ETFs in the market is the Market Vectors Russia ETF (RSX).

This Russian ETF is designed to perform like the DAX Global Russia+ Index.  The fund already has over $3.9 billion in assets, so we’re buying into an established fund here.

RSX holds large cap Russian names such as Gazprom, Sberbank, Rosneft Oil, Lukoil, and Norilsk Nickel.  In all, there are 48 stocks held in this fund, with the top 25 making up 89.45% of the funds value.

Over the past year, the fund has been in an uptrend.  The recent consolidation gives us an excellent entry point into the ETF.  And based on the growth I highlighted earlier, I expect this trend to continue for some time.

Take a look at adding some Russian exposure to your portfolio by buying RSX!

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Category: Foreign Markets

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