Brazil versus Russia: the commonalities
BRICS (Brazil, Russia, India, China, and South Africa) nations are always among the first that emerging market (EEM) (VWO) investors look towards for major allocations. Within the BRICS (BKF) (EEB) economies, Brazil (EWZ) and Russia (RSX) are exhibiting a notable correlation in recent years.
- Both Brazil and Russia are commodity-driven economies rich in natural resources
- Both economies have outperformed broad emerging markets over the past 2 years
- The stock markets of both these countries move almost in tandem with each other (see chart above), reflecting the impact of commodity price dependence of these economies
Brazil versus Russia: the differences
Over the past 1 year (ending June 13), however, the Brazilian equity-tracking iShares MSCI Brazil Capped (EWZ) has outperformed Russian equity-tracking VanEck Vectors Russia ETF (RSX). The EWZ has returned 24.80% over the past year, while the RSX has gained 13.44%. The year 2017 so far has also been more favorable to Brazilian equities which have returned 1.86% as compared to the -8.15% clocked by Russian equities YTD.
From a valuation perspective, however, investing in the Russian economy is remains a cheaper bet. The MSCI Russia index traded at a P/E ratio of 6.92 (as of May 31, 2017), as compared to the MSCI Brazil index which traded at 15.18 times earnings. Forward valuations (P/E forward) for Brazilian equity stand at 11.07. For Russia, this figure is just 5.66.
Moreover, Russian equities offers a dividend yield of 5.38% according to the MSCI indices, while Brazilian equities yield 3.3% in dividends. Even medium-term risk metrics seem to tilt the scale towards Russia. 3-year and 5-year standard deviations for Russia are currently lower than Brazil.