Russian Stock Bulls Replace Bears in Latest Surge in ETF Inflows

Aug 28, 2014 7:25 am ET

Aug. 28 (Bloomberg) -- The biggest U.S. exchange-traded fund tracking Russian stocks is luring the most money since March as investors bet the nation’s standoff with the U.S. and Europe over the Ukraine conflict is easing.

The Market Vectors Russia ETF attracted $199.3 million this month through Aug. 26, data compiled by Bloomberg show. It’s on pace for the biggest monthly increase since investors poured in $573.7 million in March. The inflow five months ago came as Russia annexed the Black Sea peninsula of Crimea, prompting traders looking to bet against the stock market to create new ETF shares that they could in turn sell short. The fund has returned 4.5 percent this month.

Money is coming in now amid signs that tension may be waning in the Ukraine conflict, luring bullish stock buyers. President Vladimir Putin reiterated a pledge yesterday to do all he can to foster peace after meeting with his Ukrainian counterpart Petro Poroshenko at a summit in Belarus.

“Investors are cautiously optimistic as there are talks and there have been no new sanctions on Russia,” Alexander Antipov, head of sales at Veles Capital LLC in Moscow, said by phone yesterday. “Russian equities are very cheap and long-term investors who buy these days expect to make serious profits when the Ukraine crisis is solved and things are back to normal.”

Stock Volatility

Equity investors have endured wide price swings this year amid concern intensifying U.S. and European Union sanctions linked to the Ukraine conflict will hurt growth. While the Micex Index has risen 17 percent from its March 14 low, it is still down 3.7 percent this year and trades at 5.2 times projected 12- month earnings, the cheapest among emerging markets. The gauge’s 90-day historical volatility peaked at 30.75 percent on July 7, the highest since January 2012, data compiled by Bloomberg show.

The Bloomberg Russia-US Equity Index of the most-traded Russian stocks in the U.S. rose 0.4 percent to 88.06 yesterday. Stocks gained as Putin and Ukrainian President Petro Poroshenko finished a meeting in Minsk, Belarus.

Russia “will do everything for this peace process,” Putin told reporters after the talks, while continuing to deny any Russian involvement in a conflict that has already claimed more than 2,000 lives. The talks were “positive,” he said.

Hours after Putin’s comments, new accusations of Russian aggression were already being voiced in Kiev. Russian soldiers have joined rebel fighters in mounting a counterattack, opening a new front against Ukrainian troops, military spokesman Andriy Lysenko said. The U.S. State Department said Russia may be directing the offensive in Donetsk and Luhansk. The claims do not “correspond with reality,” said Putin’s spokesman, Dmitry Peskov.

‘Fundamentally Attractive’

“Investors don’t expect a quick solution to the crisis, but the market assumes that there will be no new sanctions against Russia as long as the talks continue,” Igor Nuzhdin, senior analyst at OAO Promsvyaz Bank in Moscow, said by phone yesterday. “If you take out geopolitical risk, most of Russia’s biggest companies look fundamentally attractive to long-term investors.”

Short interest in the Market Vectors Russia ETF, a measure of stock borrowed to bet that it will fall, was 5.5 percent of outstanding shares as of Aug. 26, the lowest in a month, according to data compiled by Markit, a London-based research firm. It surged to a record 21 percent in March at the outset of the Ukraine conflict.

‘Performance Gap’

RTS index futures expiring next month dropped less than 0.1 percent to 125,740 in U.S. hours yesterday. The RTS Volatility Index, which measures anticipated swings in stock futures, rose 0.2 percent to 31.95. The Market Vectors Russia ETF, slipped 0.5 percent to $25.12. The Micex Index fell 1.9 percent to 1,420.46 by 3:21 p.m. in Moscow today, the sharpest slide since July 21 on a closing basis.

Investors poured a net $114 million into Russia-dedicated funds this month through Aug. 25, the highest monthly inflow since March, with the bulk coming mid-August as Russian forces appeared to pull back from the Ukraine border, said Cameron Brandt, research director at EPFR Global, a Cambridge, Massachusetts-based company that tracks fund flows.

“The performance gap between Russian equities and those of emerging markets in general is inviting, especially if you believe events in Ukraine will resolve themselves without getting close to the worst-case scenarios,” Brandt wrote in an e-mail yesterday. While emerging-market stock funds tracked by EPFR rose 10.4 percent this year though Aug. 21, Russia- dedicated equity funds fell 10.6 percent, he said.

‘No Breakthrough’

Russia funds lost $950 million this year through Aug. 25, compared with outflows of $2.4 billion in the same period in 2013, Cameron said. The funds drew $380 million in March as investors were shorting Russian stocks ahead of the annexation of Crimea that month, according to data compiled by EPFR.

Russian equity funds reported outflows every month from August 2013 through February 2014 as well as in April and May this year, according to data compiled by EPFR.

Companies on the Micex trade at a 57 percent discount to the multiple for stocks on the MSCI Emerging Markets gauge, according to data compiled by Bloomberg. The discount shrunk from a six-year high of 59 percent on Aug. 7.

“There is no breakthrough in the Ukraine crisis, but there is no major escalation either,” Alexey Tretyakov, a money manager at Aricapital in Moscow, said by phone yesterday. “Investors take that as good news.”