Russia-China prove cheap to investors as money flows rise…

For all the concern about the prospect of tougher international sanctions and signs of slowing growth, more money flowed last month into Russia and Chinaexchange-traded funds than any other emerging markets.

U.S.-based ETFs focused on Russia attracted $265 million last month, or 14 percent of their market value, the most among 47 regions after Portugal and Hong Kong, according to data compiled by Bloomberg. That was followed by Chinese funds, which drew $944 million, equivalent to 10 percent of their value.

Traders added to their Russian holdings as the six-month old conflict with Ukraine pushed the benchmark Micex Index (INDEXCF) to the steepest discount to emerging-market peers since 2008. In China, the Shanghai Composite Index rose to a 15-month high as weaker-than-expected economic data fueled speculation policy makers may take steps to boost growth.

“It appears that investors don’t believe that the situation in Russiawill worsen much further from where we are now and expect the indices to bounce again from oversold levels,” Elena Ogram, a Zurich-based investor at Bank Bellevue AG, said by e-mail yesterday. The Chinese stocks are buoyed by the prospect of economic stimulus from the government, she said.

The European Commission has pledged to propose a second round of economic penalties against Russia within the week. Ukraine and its allies in the U.S. and Europe accuse Russia of dispatching troops and backing militias to open a new front in the conflict that the United Nations estimates claimed 2,600 lives. Russia has repeatedly denied involvement.

Valuation Discount

The Micex Index rose 0.6 percent in Moscow yesterday, the first increase in three days, trimming its decline this year to 6.9 percent. The gauge trades at fives times estimated earnings, compared with a multiple of 12 for MSCI Inc.’s benchmark gauge for emerging markets, according to data compiled by Bloomberg. The discount reached 59 percent last month, the biggest in more than five years.

Russian markets have factored in “a lot of bad news,” Ole Soeberg, who helps manage about 122 billion kroner ($19.6 billion) at Skagen in Stavanger, Norway, said by e-mail yesterday.

Investors added $213 million to Market Vectors Russia ETF (RSX), the largest Russian fund of its kind, last month, boosting its assets to $1.6 billion. IShares China Large-Cap ETF (FXI), the most-traded China ETF in the U.S., attracted $518 million in August to increase the assets to $5.9 billion.

Weekly Outflow

The inflows showed some signs of petering out toward the end of August. U.S. ETFs that buy Chinese and Hong Kong shares had the biggest decline in net inflows during the week ended Aug. 29, as money entering emerging markets fell 26 percent.

The Shanghai Composite Index climbed 1.4 percent yesterday to 2,266.05, the highest level since June 2013.

The rally followed weaker-than-expected credit, production and investment data for July, suggesting the economy is losing momentum and adding to pressure on the government to step up efforts to meet its expansion target of 7.5 percent this year.

The Shanghai Composite has rebounded 13 percent since mid-March on prospects China will reduce government ownership of state-owned enterprises and that a link between exchanges in Hong Kong and Shanghai will fuel inflows.

Even with the rally, it is priced at about nine times estimated earnings, or a 26 percent discount to the MSCI Emerging Market index, data compiled by Bloomberg show. On average, the Chinese gauge traded at a 12 percent discount over the past three years. Bloomberg