beyondbrics

After a dismal year-end, Russian equities have turned a corner in 2012.  A 20-per-cent increase in Moscow’s RTS Index has drawn international investors back into the market: Russia-focused mutual funds recorded $237m in inflows in the seven days to February 1 — the highest weekly volume of inflows since April 2011. Including Russia-oriented money in broader funds, the total is $414m, also the highest since last April.

The change in fortune for Russian equities come as tens of thousands of opposition demonstrators rally against Vladimir Putin’s planned return to the presidency. So what exactly has changed in the mind of investors? The answer has little to do with Russia and a lot to do with global markets.

As Cameron Brandt, senior global markets analyst at EPFR Global, the fund monitor, tells beyondbrics, investors are taking a fresh look at risk, specifically emerging market equities and debt, buoyed by a seemingly calmer situation in Europe and Greece.

Of particular interest, he adds, is the eastern Europe, Middle East and Africa region, which looks cheap after a tough end to 2011.

For Russia, this confirms what analysts and investors have always said about the volatile Moscow market: that it is always among the best-performing (as in 2010, early 2011) or the worst (2009, the second half of 2011).

As Steven Dashevsky, a fund manager at Dashevsky & Partners in Moscow, puts it, Russia is a “second or third derivative on global markets”.

“The volatility we’re seeing in Russia – the losses of 2011 and the super of rally of 2012 – they don’t represent any serious improvements in the Russian economy or the Russian state but the global appetite for risk, which is being driven beyond Russia’s borders. It’s not going to be driven by Russian fundamentals,” he says.

However, it does seem that some Russia investors have taken at least some slight account of political factors.

One western investor told beyondbrics on the sidelines of the Russia Forum conference last week that his fund had closed nearly all of its big Russian equities positions in December – a decision he said he now believed to have been a mistake.

He added that while many investors had expected a brutal crackdown by authorities against the opposition demonstrators, the peaceful handling of the three rallies held s ofar had furthered the hope that Russia would escape any bloody unrest, and instead start to see some decline in government corruption, as the Kremlin became forced to respond to protesters’ demands.

The view may seem naive — and is certainly yet to be proven. Yet Brandt of EPFR says it is actually a sentiment shared by several: “At the moment a lot of [fund managers] believe the political risks aren’t that great and that the [March election and] transition will be relatively seamless.”

In principle, such rosy sentiments should only help Russian markets. But as Russia knows best of all, investors are a fickle bunch.

Related reading:
Equity investors send $237m Russia’s way at the end of January, Moscow Times
Tens of thousands protest against Putin, FT
Civil unrest after poll rattles Russian indices, FT