Despite the fraught political relations with the West, Russian stocks remains amongst the most popular in the world with EM investors. The average global emerging market fund's overweight in Russia has doubled in the past two years, as holdings have grown to 5.4% versus an MSCI EM weight for Russia of circa 3.5%.
At the same time a small but growing circle of Russian companies are increasingly seen as world class players in their sectors and have massively outperformed the Russian indices in the last few years.
Russian supermarket chain Magnit has long been the darling of international portfolio investors and accounted for most of Russia’s overweight by itself last year. However, the share price took a beating after Magnit’s founder and largest shareholder Sergey Galitsky sold 29% of his stake for RUB139bn ($2.4bn) to state-owned bank VTB on February 16.
Sberbank has replaced Magnit as the second biggest overweight among global emerging market funds. Meanwhile, Gazprom's underweight has narrowed, but Tatneft's has widened, Sberbank CIB’s Andrey Kuznetsov said in a note.
GEM fund managers are almost 2% overweight Russia relative to the benchmark, a figure that has nearly doubled since 2015. “While relative moves indicate more or less favour for a particular market, we note that Russia's continued status as an overweighted market reflects a structural issue, i.e. the lack of a wide domestic investor base,” Kuznetsov said.
Sberbank is now almost 10 pp overweighted versus the MSCI Russia and comprises almost 35% of institutional investments in Russian stocks. It has also taken former market favorite Magnit's place as the second largest overweight in the whole GEM universe.
At the same time Gazprom's underweight has shrunk. The stock remains the largest underweight on the market, but it has become a smaller part of the index, causing a technical reduction of the underweight position from 13 pp to 9 pp, Sberbank reports.
Tatneft is the second largest underweight. Almost no active investors have owned the stock while it has massively outperformed the market. “We believe that MSCI overestimates the real free float by some 75%, exposing benchmarked investors to an unnecessary underweight and causing some 40% of the company's actual free float to be owned by passive funds. A similar situation occurred in Transneft, where the underweight closed only after MSCI slashed the float coefficient to a more realistic level,” Sberbank’s Kuznetsov said.