Russia remains the "underdog" in terms of its weighting in the MSCI emerging markets equity index, following the index provider's latest quarterly benchmark review.
Russia remains the “underdog” in terms of its weighting in the MSCI emerging markets equity index, following the index provider’s latest quarterly benchmark review.
Russia’s Troika Dialog points to two key structural issues that stand in the way of its weight increasing: the relatively small free float for Russia’s equities, and the high barriers generally for investors to enter into the investment universe.
Troika comments: “One of the key reasons for Russia lagging behind EM peers is Russian equities’ small free float.” South Africa, for example, has a 30% higher weighting in the index than Russia (8% compared to 6%), since South Africa’s free float is 100%.
Other BRIC nations also outstrip Russia.
India comprises 6.4% of the index, while Brazil and China make up 13% and 17.8% of the benchmark respectively.
But Troika predicts this may all be about to change, as Russia’s privatisation programme could increase the free float ratio, make Russian equities more tradable, and boost the country’s weight in the MSCI EM index.
Yet in Troika’s view, privatisation initiatives are unlikely to affect other, high barriers to entry that stop Russia looking more attractive to investors generally, and gaining a higher weighting in the index this way.
The barriers for entry into Russia’s investment universe are 30% higher than those for India, for example, primarily due to the “enormous” weighting (24%) of Gazprom – by far Russia’s largest stocks by value – in the MSCI Russia Index.
Its size makes it almost a monopoly, commentators contend. The high concentration of assets makes it difficult for index investors to access other areas of the market, and therefore makes Russia a less attractive investment option.
Troika is concerned that “privatization will not help lower the barriers for entry for Russian stocks, but in fact, could even hike them.” As companies become privately owned, the worry is that it will become even more difficult for start-up businesses to make a foray into various sectors of Russia’s economy.
It points in particular to companies of post-Soviet times – so, excluding assets inherited from the Soviet Union – such as M.Video, PIK Group or Dixy Group, which it expects to remain “off-index plays”, meaning that these companies are unlikely to be able to broaden their investor base in the near future.