BRIC ETFs In Focus: Obama In Russia, Unrest In China

by on July 6, 2009 | ETFs Mentioned:

In addition to numerous earnings reports and key economic releases on the home front, U.S. investors have several international situations to monitor this week, ranging from elections in Indonesia to the ongoing dramas in Iran and Honduras. As if that wasn’t enough, two BRIC nations are also in the headlines Monday, as Russia welcomes president Obama for high-stakes diplomatic talks and China struggles to contain civil unrest in its northern provinces. As these international situations play out, several international ETFs could see some big movements.

Diplomacy In Moscow

Russian President Dmitry Medvedev welcomed Obama to the Kremlin on Monday for a two-day summit that will touch on a broad range of issues but focus primarily on the strategic nuclear weapon reserves held by the former Cold War adversaries. The two sides are expected to unveil an agreement to reduce the number of deployed strategic nuclear weapons to as few as 1,500, from current levels of about 2,200. While the relationship between these world powers is not as frosty as it was during previous decades, tensions have mounted in recent years as Russia has been frustrated by what it views as failure of the U.S. follow through on promises. As such, this week’s meetings, which for the most part exclude Russian Prime Minister Vladimir Putin (who is widely believed to be the most powerful figure in Russia) have rather high stakes. The U.S. hopes a new nuclear treaty will further isolate Iran and North Korea. But cooperation from Russia, a vocal critic of U.S policies and proponent of a new global currency to replace the U.S. dollar, is far from guaranteed.

Unrest In Xinjiang

In one of the bloodiest episodes of Chinese unrest in decades, 140 people have been killed and more than 800 injured in riots that began over the weekend in Urumqi in the northwest China region of Xinjiang. It is believed that the conflicts erupted between members of the region’s Turkic-speaking Uighur ethnic group and China’s Han majority. Activists indicated that hundreds of Uighur students had gathered to protest what they perceive to be racial discrimination and call for action from the government against those responsible for an attack on Uighur factory workers last month. The protests escalated Sunday night, as demonstrators clashed with security forces. State-run Xinhua news agency reported that rioters burned more than 250 vehicles, including 190 buses and two police cars.

While China has made great strides in recent years, the riots that erupted over the weekend serve as a reminder of the potential for instability, as well as the tremendous gaps that exist between the country’s modern urban areas (such as Shanghai and Shenzhen) and its more remote rural areas. China has been a boon to many investors over the last decade, with double-digit GDP growth fueling fierce stock market rallies. But investments in China come with commensurate risk, including political uncertainties and potential for unexpected, disruptive events.

ETFs To Watch

With many eyes on Wall Street focused halfway across the world on China and Russia, there are several ETFs that will likely be in focus this week:

  • Market Vectors TR Russia ETF (RSX): Although Russia is unafraid to voice its concerns over U.S. policies, the Kremlin is well aware that an easing of tensions with the U.S. is in the country’s best interest. If this week’s mini-summit calms investor nerves over U.S.-Russian relations, RSX could benefit.
  • Claymore/BNY BRIC ETF (EEB): China accounts for approximately 36% of EEB’s holdings, while Russia represents a much smaller portion. Although BRIC ETFs (which also include BKF and BIK) have surged in the first half of 2009, they are, as always, risky investments that are characterized by significant volatility. With two of its four component countries in focus this week, these funds could see some movements as well.
  • Claymore/AlphaShares China Small Cap ETF (HAO): Although the riots in China disrupted businesses in Urumqi, they are unlikely to have any major immediate impact on the country’s stock markets. However, the marginalization of ethnic minorities, particularly Uighurs, in China is a major issue that must be addressed if China intends to continue along its path towards global integration and acceptance as a developed market.

View fact sheets of ETFs mentioned in this article: RSX, EEB, BKF, BIK, HAO.

Disclosure: No positions at time of writing.