(Reuters) - With the threat of further Western economic sanctions hanging over Russia, foreign investors are deserting Moscow's equity markets and funneling cash into other BRICS states, with China a standout beneficiary.
Russia has performed worse than any other big emerging market so far in 2014, with stocks down 17 percent in dollar terms and the ruble losing 9 percent. In the bond market too, anyone who bought ruble-denominated debt this year would have lost 14 percent, according to JPMorgan's GBI-EM index.
Sanctions placed on Moscow for its perceived role in the Ukraine crisis do not yet bar holding shares of Russian companies that are viewed as close to the Kremlin.
But investors have been exiting all the same, fearing more sanctions that could pull other Russian assets into the net.
Data, which may not capture the latest exodus, shows that more money left Russian stocks and bonds in mid-July than at any other time in the last six months.
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Investors pulled $353 million from Russia equity funds in July and $172 million in the week after a Malaysian passenger plane was brought down on July 17 over rebel-held eastern Ukraine, according to fund tracker EPFR. Boston-based EPFR is estimated to capture some 15 percent of global fund flows.
The outpouring of money from Moscow has led analysts to ask: where is all this cash going?
As funds exited Russia, emerging equity funds as a whole, tracked by EPFR, drew buoyant flows totaling more than $10 billion over July and the first week of August.
Russia has a relatively small 5 percent share in MSCI's emerging equity index, but given $1.3 trillion is benchmarked to that index, a lot of money is at stake.
China appeared well placed to benefit as domestic factors, which had caused an early year blip in Chinese equities, began to improve just as tensions between Russia and the West reached their high point.
Hints of a stimulus plan from Beijing overlapped with the downing of the Malaysian airliner, while shadow banking and property bubble fears have generally subsided.
Evidence of an allocation shift is anecdotal but it is strong enough to suggest China is a major recipient of recent Russia outflows. China took in $1.6 billion in equity inflows last week and $2.14 billion in the last week of July, the largest since April 2008, according to Morgan Stanley.
While Moscow's main dollar-traded IRTS index has fallen 14 percent since the end of June, China's benchmark Shanghai-Shenzhen index has surged 11 percent.
For a GRAPHIC on the MSCI emerging index performance in 2014, see link.reuters.com/weh36s
Since the Russian sell-off there has definitely been a pick-up in interest in China, said Will Ballard, emerging markets and Asia fund manager at Aviva Investors in London.
"Chinese business expectations are picking up and the macro story has been improving," Ballard said, adding that in Russia, the reverse was true.
Aviva has gone to significantly underweight Russia from mildly underweight a few months ago, meaning Ballard's emerging markets fund now has less invested in Russian equities than the country's 5 percent weight in the emerging index.
At the same time, Aviva has raised its weighting on China, although it is still underweight.
Similarly, Sandra Crowl, a member of the investment committee at Carmignac Gestion, says Carmignac added to China positions early in July in its specialist emerging market funds.
"You want to invest in countries that are far off from the geopolitical problems in Europe and are able to offer some prudent credit growth and monetary easing - one country that comes to mind is China, which is our favorite emerging market at the moment," Crowl said.
Global investors have boosted overweight positions in China to a net 17 percent in August, more than three times July levels, their biggest in emerging markets, Bank of America/Merrill Lynch's monthly fund manager survey showed in August.
In Russia, investors went neutral on the market, cutting the overweight position they had in early July.
"A lot of money going into China is new money to the asset class, but it has probably bypassed Russia completely and gone straight into China," said John Paul Smith, global emerging equity strategist at Deutsche Bank.
Investors have also ploughed money into other BRICS - the so-called grouping of most powerful emerging economies, comprising Brazil, Russia, India, China and South Africa.
Brazil, South Africa and India funds all took new money last week, according to EPFR. Carmignac's Crowl said she had added to Brazil last month on the expectation that much-needed reforms may finally be on the way.
President Dilma Rousseff's lead in the polls ahead of an October election has narrowed, raising the chance of a win for a more reform-friendly candidate, as was the case in India earlier this year.
South Africa may not sound like the ideal destination for funds fleeing political risk and slow economic growth but data from the Johannesburg exchange nevertheless shows net foreign purchases of South African stocks at $2 billion this year.
Here too the stock market has surged 10 percent since Ukraine-Russia tensions escalated over Crimea.
"The South African market has probably benefited from some of the issues in Russia – in EMEA it's really the only other big liquid market that can absorb some of the sell-off," Jonathon Bell, head of emerging equities at Nomura Asset Management.
And there is always the option of cash, especially for funds that do not have the mandate to invest in China or Brazil and are less keen on emerging markets within EMEA.
Maarten-Jan Bakkum, an investment strategist at ING Investment Management, says ING's EMEA equity fund now has an 8 percent cash position, which is high by historical standards.
"That has to do with our underweight position in Russia, we have been selling Russia in and we don't plan to move back. At the same time we don't see Turkey or South Africa as attractive, they are very sensitive to Fed concerns," Bakkum said.
He was referring to expectations the U.S. Federal Reserve will raise interest rates next year.
"Poland may deserve some flows but it is a neighbor of Ukraine so that's a problem. Cash is really the best option - it's expensive to hold cash but if markets keep going down then it's not a problem," Bakkum said.