Russia's ‘uninvestible' stocks cut by MSCI, FTSE Russell

MSCI Inc. and FTSE Russell are cutting Russian equities from widely tracked indexes, while the London Stock Exchange has suspended dozens of Russian depositary receipts from trading, isolating the stocks from a large segment of the investment-fund industry.

An overwhelming majority of market participants see the Russian market as "uninvestible" and its securities will be removed from emerging markets indexes effective March 9, MSCI said. FTSE Russell will delete Russia constituents listed on the Moscow Exchange at a zero value on March 7. Meanwhile, trading in 28 depositary receipts for Russian companies has been suspended on the LSE, CEO David Schwimmer said in an interview with Bloomberg Television on Thursday.

Russia's links with global markets are getting cut with its foreign reserves frozen after it invaded Ukraine, while Moscow's capital controls and a ban on foreigners selling securities locally have shut the exit for international investors. The latest blow comes as buyers shun Russian oil exports, while its bonds get cut to junk status and companies including Shell pull out.

"We can't sell our Russian stocks," said Russel Chesler, head of investments and capital markets at fund manager VanEck Associates in Sydney. "Even last week, our brokers wouldn't sell them when the markets were open, and this will just deteriorate things further for investors."

According to Bloomberg Intelligence analysts, exchange-traded funds with global allocations will be the most affected by MSCI's and FTSE's decisions. But the impact should be "small," since Russia makes up less than 5% of the funds' global basket, said Rebecca Sin and Eric Balchunas.

Norway's Government Pension Fund Global, the country's $1.3 trillion sovereign wealth fund, has seen the value of its holdings in Russia slump about 91% so far this year. The Oslo-based fund's loss on its Russian equity stakes could amount to just under $2.8 billion under current estimates, with the stake now considered to be worth about 2.5 billion kroner ($282 million), down from 27 billion kroner at the end of last year.

Vincent Mortier, group chief investment officer for Paris-based Amundi, told clients on Thursday that it was becoming difficult to reduce its exposure to Russia at the moment. Schroders CEO Peter Harrison said earlier that it was very hard to think of Russia as anything other than uninvestable.

The London Stock Exchange's move to suspend Russian depositary receipts is "in connection with events in Ukraine, in light of market conditions, and in order to maintain orderly markets," LSE said in a statement. It also noted that less than 1% of its total income comes from operations in Russia and Ukraine.

While Moscow has kept its stock market closed since Monday, foreign-listed shares in Russian companies plunged this week. To support its market, the country announced Tuesday that it will deploy up to $10 billion from its sovereign wealth fund to buy up equities.

The expulsion of Russian bonds from indexes could be next, with billions of dollars left in limbo less than one week after the invasion.

FTSE Russell said it's evaluating the impact of sanctions on the nation's bonds. J.P. Morgan Chase is reviewing the inclusion of some debt from Russia, Belarus and Ukraine in its indexes while Intercontinental Exchange Inc. will remove those issued by sanctioned Russian entities.

"Some funds may end up marking their book value for Russian assets as zero," said Hiroshi Matsumoto, senior client portfolio manager at Pictet Asset Management (Japan). Once investors try to sell Russian bonds, they will "probably have close to no value and it'll probably be the same for stocks."

Russia has a weighting of 1.85% in the Bloomberg Emerging-Market Local Currency Index, and makes up 2.22% in J.P. Morgan's Emerging-Market Bond Index Plus.

Russia's removal from key equity gauges means other emerging markets may benefit from fresh inflows.

India and China could be beneficiaries, according to Vishnu Varathan, head of economics and strategy Mizuho Bank in Singapore. Alan Richardson, a portfolio manager at Samsung Asset Management, said capital flows may pivot to Indonesia and Malaysia, which share similarities to Russia in terms of their commodity-based economies.

Russia had a 1.5% weighting in the MSCI Emerging Markets Index, and 1.3% for FTSE Russell's comparable gauge, according to data compiled by Bloomberg.

"The removal of Russia from key indexes will be a positive thing for investors given the uncertainty surrounding the economy and potential settlement risks," said Naoki Fujiwara, chief fund manager at Shinkin Asset Management.