Global financial markets got a little good news for a change out of Russia on Monday.
Shares of Market Vectors Russia ETF (ticker:
Volume (Delayed 15m)
Rev. per Employee
) rebounded by roughly two percent on the day after the ruble was bolstered by encouraging words from Russian President Vladimir Putin and implications that the country’s central bank would act more forcefully to stem the currency’s big fall this year.
But several articles about Russian’s financial and economic problems suggest that the country, despite Monday’s good news, has some deep-seated problems that can pose a threat to global equity markets in the months ahead.
In a column for Bloomberg View Monday, market pundit Mohamed El-Erian provides a measured analysis of the country’s problems.
On one hand, El-Erian, the chief economic adviser to German financial-services firm Allianz, points out that “buffeted by Western sanctions and lower oil prices, Russia has suffered a significant decline in net foreign earnings.”
He writes that “capital is fleeing the country, and corporations and households are looking to switch out of rubles and into dollars and other hard currencies.”
He also points out that “it’s probably only a matter of time until the country loses its investment-grade credit rating, raising its borrowing costs and narrowing further its creditor base. The situation will be acute for companies and banks whose balance-sheet positioning requires them to pay more rubles to obtain the dollars needed to meet their foreign obligations.”
But El-Erian also sees reasons for Western investors to not get too bent of shape by Russia’s woes. “While Russia’s creditworthiness is under significant pressure… the country’s debt-servicing capacity isn’t exhausted, provided the authorities can better manage the movement from rubles into dollars.”
He also writes that the “negative spillover effects of Russia’s financial turmoil are a lot less than they were in 1998,” when a Russian default caused global economic and financial disruptions.
“While some Western banks and investors still have notable exposures, quite a few responded to Western sanctions in the last few months by reducing their holdings and preparing for further turmoil,” he concluded.
CNNMoney also weighed in on Russia’s financial issues with a less measured and more pessimistic piece than El-Erian’s. It states “the 5 reasons Russia may face worse times.”
The piece’s unrelentingly negative tone, however, doesn’t square with the news today that Russia’s leadership from Putin to the central bank is at least seeking to turn things around.
This story would have been better if it stated a few reasons why the country may seek to face better times.
I’ll close with an very good article on a completely different topic.
In a piece that appeared over the weekend in the Wall Street Journal, Morgan Housel, a columnist with Motley Fool, cites research that makes it very clear that there is little correlation between variables like measure of economic health and resulting stock-market returns.
Wall Street Journal
Housel cites a study by Joe Davis, the chief economist of asset manager Vanguard Group, who looked at data going back to 1926 and measured how popular economic yardsticks correlated with future returns of the SP 500 index.
“Mr. Davis’s research, originally published in 2012 and recently updated through the end of last year, shows that the change in GDP growth rates—a closely watched measure—tells us virtually nothing about what stocks might do next,” writes Housel. “Changes in GDP growth rates have a correlation to inflation-adjusted stock returns over the following year of just 0.01, and 0.05 when looking at the next 10 years’ returns, using a scale in which 1 stands for perfect predictability and 0 shows no correlation at all “
So what’s the moral of the story, according to Housel?
“Markets rarely move in intuitive ways, where measuring something logical today tells us what stocks will do tomorrow. They are far messier,” he writes. “Even if investors could predict what, say, interest rates might do in the future, knowing how markets will react is another story. Interest rates might jump because inflation is rising, which is generally bad for stocks. Or they could jump because real economic growth is increasing, which markets might like.”
He concludes: “Often, the biggest drivers of future stock returns are changes in investor emotions, which are impossible to quantify today.”
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