There’s something interesting going on with Russia. The VanEck Vectors Russia ETF’s (RSX) tight correlation with oil seems to have broken down over the last few weeks and looks like a bullish set up. In our commentary last month, we specifically mentioned avoiding emerging markets that were tied to oil because oil had already run up so much from its lows. But this month is different. Notice the tight correlation between Russia and oil from mid-May through the end of June in the chart below. Then the relationship breaks down through the month of July as oil fall about 20% while Russia stays breakeven or better. This makes us think that if oil bounces back at all this month, there could be a significant rally in Russian stocks. Some commentators have made the case that a recent tax overhaul for the oil and gas industry in Russia has improved their margins, which could be one reason for its resiliency. http://www.forbes.com/sites/kenrapoza/2016/07/28/tectonic-shifts-coming-to-russian-oil-industry/?utm_source=yahoo&utm_medium=partner&utm_campaign=yahootix&partner=yahootix#472016622f7e
Additional sectors that we think are attractive are iShares MSCI South Korea ETF (EWY), Utilities Select Sector SPDR ETF (XLU), First Trust Dow Jones Internet Fund (FDN), and iShares US Defense & Aerospace (ITA).
South Korea had a recent breakout above resistance, then pulled back and held support, and now looks poised to rally.
The Utilities sector has had a great run this year and we think the low interest rate environment and continued political and economic uncertainties will cause this sector to continue to be a favorite for investors who seek a safe haven and dividend yields.
The First Trust DJ Internet Fund contains many of the high-flying growth companies that draw so much media attention, with its largest holdings being Facebook, Amazon, Google, and Salesforce. Through this earnings season, many e-commerce companies have been significantly outperforming analyst estimates, which we think could propel this group higher this month.
The Defense and Aerospace sector is an attractive sector to us because the frequency of global conflicts seems to be accelerating (e.g. all-to-common terrorist attacks, the attempted coup in Turkey, etc.). This could put pressure on the US government to increase military spending, especially if the Republicans take the White House this fall.
The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.