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Investors pile in as Russia comes in from the cold

Investors have ploughed the most cash into Russian equity funds over the past week since 2011, as a higher oil price and signs US president-elect Donald Trump will seek to thaw relations with Vladimir Putin encouraged flows.

Russian stock funds recorded inflows of $451m in the week to December 14, the biggest haul since the first quarter of 2011, according to data tracker EPFR. Mutual funds and exchange traded funds invested in Russian bonds had their largest inflows since February 2015.

The sharp rise in the oil price since the Opec cartel’s agreement to cut supply last month is proving a boon to ETFs and mutual funds with mandates to invest in Russian assets. Some of the largest funds have seen assets rise by as much as a third since late November, when Opec ministers struck their accord.

Assets, for example, within the VanEck Vectors Russia ETF have swelled 33 per cent to $2.5bn since November 29, while the iShares MSCI Russia ETF has seen a 16 per cent rise in assets to $438m. The size of JPMorgan Funds’ Russian equity fund has climbed 9 per cent over the same period.

“The valuation was extremely attractive and the recovery of oil is very supportive of not just the equity market but of [Russia] politically,” said Vinay Pande, head of short-term investment opportunities at UBS Wealth Management. “When oil was sliding, people were not just concerned about equities but about stability there.”

While only small amounts compared with the flows in and out of much bigger equity markets such as the US, the appetite for Russian equities and bonds illustrates how rapidly sentiment can turn.

New highs for the oil price, which is up 16 per cent since Opec members agreed their deal, have been the chief driver, but analysts also point to the potential improvement in relations between the Kremlin and the incoming Trump administration in Washington.

The US president-elect’s nomination of Rex Tillerson — the former ExxonMobil chief executive who negotiated a deal with President Putin to develop Russian oil reserves — as secretary of state has raised the prospect that the US could ease the sanctions imposed on Russia over Ukraine. Strategists at Citi said they expected a “significant softening in the US stance” towards Russia and its sanctions programme, which is up for renewal in March.

“There is a potential budding friendship between our two countries [the US and Russia],” said Dave Mazza, head of ETF and mutual fund research at State Street Global Advisors. “Investors have extrapolated that we are going to have a more friendly relationship with Russia.”

The recovery of oil is very supportive of not just the equity market but of [Russia] politically

The Russian Micex stock index has climbed 27 per cent this year, with its advance in US dollar terms just below 50 per cent, boosted by the recovery of the rouble.

The flows into Russian stock funds bolstered emerging market equity funds over the past seven days, with the commodity price-sensitive asset class absorbing $829m of fresh cash.

Emerging market bond funds, by contrast, saw their sixth consecutive week of outflows as the Federal Reserve increased interest rates for the second time since the financial crisis. Redemptions slowed to $1.2bn from $2.3bn the week before, but nonetheless reduced the sector’s inflows for the year to $24bn, EPFR data showed.

Investors anticipating faster economic growth ploughed more money into US equity and high-yield corporate bond funds, with $18.4bn and $3bn flowing into the two asset classes, respectively. US stock fund managers have counted roughly $60bn of inflows since last month’s election, propelling benchmark equity indices to record highs.

The fresh capital has stemmed the cumulative outflow from US equity funds for the year to $27bn from $92bn at the beginning of November.

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Twitter: @ericgplatt

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