Incredible Shrinking Russia
By Chris Weafer
Russian equities now only represent a 5% share of the average global emerging market portfolio. In mid 2008 the share was more than double that at 12.1%.
Funds that are benchmarked against the MSCI Indices are now almost neutral in Russia while the international funds have been the big sellers amongst the mainstream institutions.
In terms of equity fund flows, Russia is currently almost sidelined.
From “hero to zero” from July to end 2008, Russia has a tough struggle to rebuild the attraction to international investors that it enjoyed only six months ago.
Global flows cause high beta effect. One of the main reasons why the Russian equity markets fell so sharply over the second half of last year was because international investors dumped Russian stocks from global portfolios. Unlike investors in benchmarked portfolios, these investors did not need to be in Russia for risk management reasons. That is one of the factors that have given the Russian markets such a high beta relative to the emerging market average. But those investors are now largely out of Russia, hence the selling pressure seen in the market over 3Q08 and 4Q08 has now ended. While it is certainly too early to talk about new money entering the market, assuming there is a “dawn after the darkness”, Russian assets will again attract investment from these global investors. When that starts, and given the relatively small weighting that Russia has today within global portfolios, the high beta effect will act in reverse and sustain relative out-performance.
Russia weighting fell heavily. At the start of this year, Russian equities were only the seventh most important to emerging market focused investors that benchmark their portfolios to the MSCI Indices. One year ago, Russia was the fourth most important. The other three so-called BRIC countries are, on aggregate, six-times more important in weighting and performance terms. This means that portfolio managers can today more comfortably overlook Russian assets than those other countries that represent a larger portion of their performance benchmark indices.
Tougher to get noticed. The upshot is that Russia will now have to fight a lot harder to improve its investment credentials and to make Russian equities relatively more attractive than equities of countries which, today, have gained more prominence with the international investment community. It took four years to build the country’s position with emerging market investors and only six months to reverse it all.
Funds are not underweight Russia. Based on data from EPFR and MSCI, funds that are benchmarked against the MSCI Indices are not underweight Russia. Certainly, the Russian portion of these funds is only half of what it was one year ago, but the weighting of Russia is more or less currently in line with Russia’s weighting within the MSCI GEM Index.
Some mismatch with index. When comparing the structure of an average portfolio of Russian equities within the GEM universe with that of the structure of the MSCI Russia Index, then the biggest under weights, or those stocks that should see more buying pressure once they start to gain in price, include RusHydro, Polyus Gold and LUKOIL. The stocks that are currently most overweight and, hence, might see less scope to buy further, include the mobile telecom stocks and Sberbank. Sberbank’s weighting was built up in anticipation of the London IPO that was scheduled for the stock in the spring of last year and this will likely be maintained as long as that listing plan remains intact, in spite of the timing being unknown
RusHydro is most underweight. RusHydro looks best placed from a technical viewpoint, as the company plans to list GDRs when market conditions allow. When that takes place then funds, currently not able or reluctant to but local shares, will have to buy and reduce the current underweight position.
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