He’s back. The legendary investor in the white suit who lives in a plane — Mark Mobius — is starting to invest in Russia again.

Mobius has a long track record in Russia, being one of the first to plunge into the market in the early 90s when Boris Yeltsin created the first Russian equivalent of the mutual fund, the so called PIFs, in 1997. Mobius’ fund, Franklin Templeton Investments, gambled that Russia was through the worst of the transition chaos and with pension reforms and privatisation on the way, that was the perfect time to invest big in local mutual funds.

And he should have been right. The yields on the state’s treasury bills, the GKOs, had fallen into the teens, the ruble was more or less stable to the dollar, inflation was falling and the stock market was flying. But he wasn't right after all. The Asian crisis in 1997 knocked the bottom out of oil prices and a year later Russia went into the 1998 financial crisis.

Mobius kept some cards in the game and did well in the boom years, but in the first quarter of 2014, several Mobius funds, including the Developing Markets Trust, dumped most of their $37.6mn portfolio.

Now the tide seems to be turning again for Russia’s equity markets; in 2016 with the end of the recession in sight and geopolitical tensions easing, investors decided Russian stocks were too cheap to ignore any more. The leading RTS index gained just over 50% in a year.

Russia has overtaken India as the largest overweight position for emerging market equity funds in September, ending a long run for India as the investor’s darling since reformer Prime Minister Narendra Modi took the leadership.

The average EM equity fund is now overweight Russia by 1.46pp, surpassing the 1.4pp figure for India, where fund managers had an average overweight position of 4.4% in early 2015, according to Copley Fund Research that complies data on emerging markets (EM) based on the holdings of 126 funds with combined assets of $300bn. Of these funds some three quarters (72.8%) are now overweight Russian equity. Russia has become easier to invest into for fund managers after its share in the MSCI Emerging Market index has fallen to 3.3%, half its weight in early 2012.

The most popular stocks with these fund managers are Sberbank in the first place, followed by the new retail king, the X5 group that over took former investor’s darling Magnit to become Russia’s biggest supermarket chain by turnover. Other stocks that are included in this “tourist basket” are search engine Yandex that remains the largest tech stock in Europe by capitalisation, and Lukoil, Russia’s leading privately owned oil company.

However, despite the enthusiasm so far this year the markets have not performed well. The ruble denominated Moscow Interbank Currency Exchange (MICEX) is down 7% YTD and its sister dollar denominated Russia Trading System (RTS) is down 2%. But that actually represents gains on a double-digit fall in the first quarter and Russia’s equity markets have been recovering since the beneficial effects of the “Trump bump” wore off in the spring.

In the first half of 2017, Emerging Markets Funds Templeton Developing Markets Trust and Templeton Emerging Markets Fund, part of Mobius’ group, acquired US depositary receipts of Russian state-owned retail banking giant Sberbank for $15.8mn and $3mn, respectively. Templeton’s funds reported on their investment on the website of the US Securities and Exchange Commission at the start of October.

This is definitely just a toe in the water as Sberbank has become a bit of a “tourist stock” for those that want to own something Russian, but don't want a deep commitment. As the country’s leading bank, Sberbank is a convenient way of getting exposure to the entire Russian economy, but with its explicit government guarantee is more safe than houses.

EMs outperform, but Russia is the laggard

Mobius’ return to the Russian market is in keeping with a general rising interest in emerging markets and a slow rotation out of bonds, which have been hansome performers, into equities.

While the US equity markets continue to set fresh record highs, they are clearly starting to look a bit toppy and managers are looking around for places to park their profits.

The S&P500 index closed up 0.22% on October 1 to set yet another fresh record. European markets were also modestly firmer and the MSCI EM equity index rallied off the 50-day moving average as there has been solid technical support for the index through the course of this year, opined the Institute of International Finance (IIF) in a recent note.

One of the big drivers into emerging markets (EM) equities is the improved performance of the Chinese economy. The World Bank raised its real GDP forecast for China this year to 6.7%, from 6.5%, and for 2018 to 6.4% from 6.3%, in line with the consensus view.

The IIF’s capital flow tracker shows that funds are now clearly flowing into EM markets. YTD some $80bn has been invested in global EM markets. The total non-residential portfolio inflows into EM was $14.5bn in September alone – the same as August — although Russia is getting the least of this money. Russia is always the last in the rotation of inflows into EM markets from international funds as it is seen as the most risky of the major BRIC markets.

“Non-resident capital flows to EMs should rise to $1.1 trillion this year, up from $763bn in 2015. This amounts to about 4% of EM GDP — a good recovery from 1.5% of GDP in 2015, but still well below the pre-crisis peak of over 9% in 2007. Almost all components have risen, led by the doubling of portfolio debt inflows to $242bn and “other investment” inflows (largely banking-related) to $293bn — reflecting the search for yield. The exception was a fourth yearly decline in FDI flows, to $467 billion, probably due to the lagged impact of falling commodity prices, protectionism and onshoring — a concern as FDI had been a very stable component of otherwise volatile capital flows to EMs,” the IIF said in a note.

 

Net EM Capital Flows
USD billion	Brazil	Chile	China	India	Indonesia	Mexico	Poland	Russia	S.Africa	Turkey
2017Q1	7.9	-1	-20.9	10.7	6.9	9.1	-5.7	-12	1.4	4
2017Q2	0.1	1	-19.3	25.7	5.7	-3	-3.1	-6	1.5	14.5
Jun-17	-0.8	1.2	9	8.6	-0.7	-1.5	1.4	0.6	0.2	6.8
Jul-17	5	0.8	-22.2	5	6.8	-1.2	-3.5	-3.5	-0.8	2.7
Aug.2017	0.8	0.3	-11.5	4.8	2.5	0.7	0.1	-2.7	0.2	4
Ytd(2017)	13.8	1.1	-73.9	46.2	21.8	5.6	-12.2	-24.2	2.3	25.1
Memo:
Ytd(2016)	21	3	-386.8	15.6	19.4	21.1	11.6	-3	6.5	33.3
2016	32.5	5.4	-639.7	29.5	28.8	23.4	18.8	-16.6	12.4	33.4
IIF 2017 forecast	26.4	7.2	-81.5	70.2	29.1	12.3	-5.4	14.2	8.3	36.6