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. Last Updated: 07/27/2016

Market Exasperation Blamed for the Slump

Having come up for air at the end of March and in the first half of April, Russian markets have gotten that sinking feeling once again. But this time, no single factor -- except a general exasperation with the riskiness of Russian stocks -- seems to be behind the slump.

Since April 13, when the RTS broke through the 2,000-point barrier, the story in Russia has been one of creeping decline. The index closed Friday at 1,859 points, up 0.8 percent for the week after four gloomy weeks in the red.

Analysts blamed a lot of the sluggishness on the VTB initial public offering, which siphoned billions of dollars out of the market as investors sold off equity to free up money for VTB shares.

But mixed news from this month's Merrill Lynch survey of global fund managers suggested deeper reasons for the downturn. The good news to be taken from the survey was that investors have recovered a lot of their bullishness, which had been badly dented after a worldwide correction in February, leaving many convinced that the global cycle of growth was reaching its end.

Now, following April and May rallies on U.S. and European markets, traders have begun to think of that correction as a midcycle pause, and are carefully getting back into the fray, David Bowers, the Merrill Lynch consultant who conducted the survey, said during a conference call Wednesday.

But to the detriment of Russia, they also seem to have changed their game plan. European stocks look to have unseated emerging markets as the global investors' favorite, and 56 percent of the survey's respondents said they were now overweight in Euro-zone equities, with another 15 percent eager to follow suit.

Last Monday, Alfa Bank attributed this trend to a "takeover frenzy" in Europe, saying in a note to investors that takeovers there have reached an astounding value of $1.1 trillion so far this year. But Karen Olney, Merrill Lynch's chief European equity strategist, said during Wednesday's conference call that the "infatuation" with Europe went deeper. The maturity of European markets makes for reliable growth and greater immunity to external shocks, a coveted relief for emerging market investors, who seem fed up with the downturns born of these shocks in the last 12 months. "The jitters we saw in February and the major slump in May of last year were a wake-up call to all fund managers," said Roland Nash, head of research at Renaissance Capital. "The market recognized that if there is going to be any shock, then Russia will be one the markets that will suffer most, and as a result they have been taking money off the table."

Emerging Portfolio Fund Research has reported four consecutive weeks of more than $50 million in outflows from the Russia and CIS fund category. Other emerging market funds, especially China's, are feeling even greater pain, but the hemorrhaging is still far from becoming critical, said Kim Iskyan, co-head of research at UralSib. "There are big, dedicated pools of money in emerging markets," Iskyan said. "A shift to European funds could happen, but it would be a longer-term trend. For now it is more a question of shifting money around within emerging markets."

The good news is that the sickness has been limited to certain industries -- although unfortunately the biggest ones. The hydrocarbons sector, which represents more than half of the total value of Russia stocks, is down more than 17 percent for the year. Nash said to keep an eye on pipe makers, construction firms and companies in the financial sector: "There's still a lot of potential there."