Russian stocks have far underperformed U.S. equities so far this year after a big bull run in 2016, and they could fall further amid a confluence of political and economic forces.
The Moscow composite index is down nearly 8 percent year to date, underperforming the U.S. by nearly 15 percent as optimism around the possibility of the removal of trade sanctions against Russia fades. And crude oil, which weighs heavily on the Russian economy, has traded in a narrow range so far this year, offering no help to Russian stocks.
There is perhaps no trade more political right now than the Russian trade, said BK Asset Management's managing director of foreign exchange strategy Boris Schlossberg. Russian equities would only look attractive here should a perfect storm of warming U.S.-Russia political relations, a thawing trade embargo and strong crude oil strike.
"Ironically enough, I actually think that all of this focus on the Trump-Putin ties makes it far less likely simply to have a thaw in ties, and therefore the sanctions and all the other political ramifications that surround Russia really put a huge question mark as to whether the rally can continue," Schlossberg said Tuesday on CNBC's "Trading Nation."
At first it appeared toward the end of last year that sanctions against Russia would be lifted under the Trump administration, but optimism has appeared to fade as the administration faces federal probes into ties between the two governments.
An NBC News/Wall Street Journal poll published last week shows approximately half of Americans believe Congress should investigate whether Donald Trump's presidential campaign had contact with the Russian government last year, and to what extent the Russian government interfered with the U.S. presidential election.
The VanEck Vectors Russia exchange-traded fund, the RSX, is a popular way for U.S. investors to gain exposure to Russian equities; the fund is down 3 percent year to date. From a technical perspective, it doesn't look promising, said Ari Wald, Oppenheimer's head of technical analysis.
"We see the case to buy Russia in ruble terms; unfortunately U.S. investors don't have that option, so we recommend staying away," Wald said, referring to the falling Russian ruble.
Examining a chart of the RSX, the fund is both falling below a multiyear downtrend as well as its prior lows from 2012, Wald said.
"So at best, we see this as a base; at worst, we see this as a resumption of that longer-term downtrend. Added up, risk-reward is very poor here. We recommend staying away," he said.
These moves lower in Russian equities come after a big run in 2016; the RSX rose 15 percent in the month following the U.S. election in November as investors bet on better U.S.-Russia political relations.