With the threat of further Western economic sanctions hanging over Russia, foreign investors are deserting Moscow’s equity markets and funnelling cash into other BRICS states, with China a standout beneficiary.
Russia has performed worse than any other big emerging market so far in 2014, with stocks down 17% in dollar terms and the rouble losing 9%. In the bond market too, anyone who bought rouble-denominated debt this year would have lost 14%, according to JPMorgan’s GBI-EM index.
Sanctions placed on Moscow for its perceived role in the Ukraine crisis do not yet bar holding shares of Russian companies that are viewed as close to the Kremlin.
But investors have been exiting all the same, fearing more sanctions that could pull other Russian assets into the net.
Data, which may not capture the latest exodus, shows that more money left Russian stocks and bonds in mid-July than at any other time in the last six months.
Investors pulled $353m from Russia equity funds in July and $172m in the week after a Malaysian passenger plane was brought down on July 17 over rebel-held eastern Ukraine, according to fund tracker EPFR. Boston-based EPFR is estimated to capture some 15% of global fund flows.
The outpouring of money from Moscow has led analysts to ask: where is all this cash going?
As funds exited Russia, emerging equity funds as a whole, tracked by EPFR, drew buoyant flows totalling more than $10bn over July and the first week of August.
Russia has a relatively small 5% share in MSCI’s emerging equity index, but given $1.3tn is benchmarked to that index, a lot of money is at stake.
China appeared well placed to benefit as domestic factors, which had caused an early year blip in Chinese equities, began to improve just as tensions between Russia and the West reached their high point.
Hints of a stimulus plan from Beijing overlapped with the downing of the Malaysian airliner, while shadow banking and property bubble fears have generally subsided.
Evidence of an allocation shift is anecdotal but it is strong enough to suggest China is a major recipient of recent Russia outflows. China took in $1.6bn in equity inflows last week and $2.14bn in the last week of July, the largest since April 2008, according to Morgan Stanley.
While Moscow’s main dollar-traded IRTS index has fallen 14% since the end of June, China’s benchmark Shanghai-Shenzhen index has surged 11%.
Since the Russian sell-off there has definitely been a pick-up in interest in China, said Will Ballard, emerging markets and Asia fund manager at Aviva Investors in London.