Institutional Investor Positioning - Share Placements Drive Stock-Level Flows

In this note, we provide an update on institutional investor positioning in Russia. We demonstrate that Russia has become the largest overweight for GEM funds. Yet foreigners' allocation to Russia has not changed much. On the stock level, funds were cutting exposure to value stocks to finance participation in IPOs and SPOs.> Russia the largest overweight in GEM. Russia makes up 4.7% of GEM investor portfolios, versus its 3.5% weight in MSCI EM. Meanwhile, China remains the largest underweight, positioning that should prove favorable for fund managers in 2021.> Positioning in individual stocks. The preferences of institutional investors remain heavily tilted toward growth stocks. Yandex, Sber and Novatek are the biggest overweights, while Gazprom and Nornickel are the largest underweights.> Building supply-demand balance for Russian stocks. Foreign funds have slightly reduced allocations to Russia, pulling out $700 mln since the beginning of 2020. In the meantime, local investors brought in $10 bln, while corporates sold $11 bln worth of shares in IPOs and SPOs. Buybacks returned $1.7 bln to the market. This calculation illustrates that it is not foreign funds, but local investors and corporates that are moving the needle in the new reality.> Stock-level flows. Share placements were the key driver for flows in individual stocks. Foreign investors were buying the IPOs of Ozon and Fix Price and the SPOs and ABBs of Yandex, Polymetal and TCS. In the absence of new allocations, they had to finance these purchases by selling down their largest positions in Gazprom, Sber, Nornickel and others. Local investors in turn were buying these names.> Outlook. We expect the supply-demand balance for the Russian market to remain the same in the future. Flows from local investors will likely continue, while foreign funds will allocate no new money to Russia. In the meantime, the IPO pipeline for the next 1.0-1.5 years suggests that stock supply will remain quite sizable. Most of the shares due to come to the market are from the new economy. Foreign funds, which have a clear preference for growth, will be the main buyers in these placements. These purchases will be financed by the sale of large value stocks. Retail investors, in turn, are hungry for yield and will be buying value names.