Outflows from Russia unlikely to benefit Asian markets

A growing list of corporates and investors have committed to pulling their investments from Russia, leaving observers to ponder where the outstanding funds will flow.
Outflows from Russia unlikely to benefit Asian markets

A version of this article was first published on FinanceAsia.

Pressured to take a stance against Russia’s invasion of Ukraine last month, corporates and fund managers have stated their intention to pull investments from the market, with index providers, FTSE Russell and MSCI announcing last week that they would remove Russian stocks from their emerging market indexes.

While Asia might seem an attractive destination for this newly available capital, no one country in the region is likely to benefit significantly, at least in the short team, experts believe.

Russia’s expulsion from the indexes is unlikely to have a major impact on flows from passive funds tracking MSCI and FTSE Russell, because of Russia’s small representation in these in the first place, suggested Kunjal Gala, lead portfolio manager for emerging markets at asset manager, Federated Hermes.

“Prior to the conflict, Russia made up less than 5% weight within the [MSCI] benchmark. Now, its weight is down to circa 1.3%. MSCI is expected to exclude Russia in full and consequently, economies across emerging markets will benefit depending on how MSCI re-allocates the Russian funds, [but this] is not going to be a major game changer for liquidity flows to any particular country,” he told FinanceAsia.

According to Bloomberg, Russia had respective weightings of 1.5% and 1.3% in the MSCI and FTSE Russell Emerging Markets indexes before the exclusion.

Singapore-based Vivek Sharma, head of the International Clients Group at Edelweiss Financial Services, agreed that the move by FTSE and MSCI was symbolically important, but concurred with Gala that the impact would be immaterial.

“Yes [those outflows] could definitely be re-allocated to other remaining countries in the indexes, but take India, for example, which comprises 12.5% of the MSCI emerging market index – if that small outflow is re-allocated to so many countries and India is only 12.5% of that potential allocation, you can imagine well how insignificant that sum could be,” he said.

The impact for active funds (i.e. those not tracking an index) is likely to be even smaller, since, unlike passive funds, active funds will not be forced to reallocate capital.

“Today, no active fund is going to take a position in Russia or Ukraine. But not taking a position does not mean that they must re-allocate to some other market as a result of this event,” Sharma explained.

Moreover, he questioned investors’ actual capacity to exit their positions in Russia, given a lack of willing buyers, Russia’s introduction of capital controls, and other legal and regulatory hurdles.

“How realistic or efficient is it going to be for these for these foreign investors to liquidate their investments in Russia?” he asked.

Alternative investors opined on this too. One private equity firm argued that Asia could act as a safe haven for private capital, given the region’s lack of direct links with the conflict (bar China).

“I believe in the short to medium term, it is likely that the outstanding liquidity will funnel into large, stable markets, and I think Indonesia could be a net beneficiary of that...[as could] Southeast Asia, India and markets that continue to be perceived as stable,” said Sandeep Naik, managing director and head of India and Southeast Asia at General Atlantic, speaking at the Indonesia PE-VC Summit last week.

However, Cedric Chehab, global head of country risk at Fitch Solutions, noted that a lack of overlap between Asia and Russia in terms of investable industries, might make Asia a poor substitute for Russia-focussed financiers.

“A lot of funds taking money out of Russia are related to energy investments,” he said, “although other sectors are also seeing investment capital flowing out.” Asia could provide investment opportunities in high growth sectors such as infrastructure, manufacturing and consumer goods, he told FA.

BPShell and Equinor are among those pulling out of oil and gas investments in Russia. Apple and Ikea have paused product sales, while Norway’s $1.3 trillion sovereign wealth fund has announced plans to divest entirely from Russia.

The conflict entered its 20th day on Tuesday (March 15).

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