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Risks and Opportunities in a New Era for Stock Markets
3 June 2021
15:00—16:15
KEY CONCLUSIONS
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Currently, the figure that they talk about and use is 12 million brokerage accounts. That said, I would rather rely on a different number. I am talking about 5 million funded accounts. That is probably crucial. It means that around 7% of the economically active people invest in the stock market in one way or another. <...> About 70% of them are start-up investments up to RUB 100,000 for beginners — Dmitriy Panchenko, Investment Business Director, Tinkoff Bank.

Every Russian bank that I know of has a strategy to engage clients with deposits into investment funds, insurance products, structured notes, mutual funds. That is a global trend. <...> Many securities issuers want to join the market. This is a normal process, which, I believe, is going to accelerate, and the markets will increase in terms of liquidity, economic representation, and listings. We are on a path that will take many more years, on the condition of low inflation that we expect — Timothy Talkington, Co-head, Russia & CIS, Goldman Sachs.

The industry should not just make money off them [individual investors, – Ed.], it should be useful to the clients, so that they could make money. Because if a client makes money, there is going to be network effect, – or word of mouth, or whatever you call it – it will engage individual investors — Sergey Shvetsov, First Deputy Governor, Bank of Russia .

Goldman Sachs did a report, I believe it was 5 or 6 years ago. They surveyed 46 countries that had gone through a so-called disinflationary shock. <...> The fact of the matter is, in Russia we suppressed inflation and we found ourselves in a perfectly new situation – but 40 countries had gone through that before us. That is not the situation in 2020–2021, if we – and I believe we could – restrain inflation down to a normal level, this would absolutely be the trend for people, for retail investors, to find their way to the stock market — Mikhail Zadornov, Chairman of the Management board of Otkritie FC Bank.

Only 11% of Russian people’s savings are invested in stocks. In the US, the number is 51%. But if we take a look at China, for example, it is 47%. If we look at Brazil, it stands at 53%. So, theoretically, the share of stocks in the savings of Russians can grow 4 to 5 times. It will happen, it is only a matter of time — Jacob Grapengiesser, Partner, Head of Eastern Europe, East Capital.

ISSUES
Sluggish development of the Russian investment market has to do with investors striving to educate themselves

We now see the process of private investors joining the stock market as a kind of educational process. Clients mature rather slowly, they start replenishing their brokerage accounts with funds comparable to about half of their salaries, on average. And then they master the stock market rather slowly and gradually. <...> Before making their first deal, the clients often read through thousands of pages. <...> Clients thoughtfully read the analytics and browse through educational content — Dmitriy Panchenko, Investment Business Director, Tinkoff Bank.

Foreign capital on the Russian stock market will not cope with the upcoming IPO boom

Our stock market is entering into what I would call the third stage of its development, when dozens of tech companies will get stock exchange listings. They will attract a lot of interest from both institutional and retail investors. <...> We are definitely headed for an IPO boom. <...> One way or another, this will result in a certain number of security issuers from very different sectors, that will need access to equity capital. As we are practicing in this, our assessment is unambiguous: demand from international investors will not satisfy the need for capital raise <...> at the moment — Alexei Yakovitsky, Global Chief Executive Officer, VTB Capital .

Most retail investors do not assess the risks

I am not so sure that such a number of actively trading individuals is a good thing at this time, because I doubt that at least 1% of those who participated in the IPO have read the prospectus and recognized what risk they were undertaking. <...> I do not think it is great when a client holds 120 names. It only means that they do not monitor them properly: it is impossible, it is a lot of work. As someone who was involved in professional trading, I can tell you that it is impossible — Andrey Shemetov, Senior Vice President, Head of SberCIB, Sberbank.

Individual investors do not understand that if they trade on margin, they could run into debt. This would be a gigantic disappointment for them — Sergey Shvetsov, First Deputy Governor, Bank of Russia .

Dual-listed Russian companies

Finally, the thing that everyone sees is the regulator’s tolerance towards dual listings, when Russian companies are listed at the Moscow Exchange in one way or another, and at NASDAQ, or LSE. Sadly, they get listed as foreign companies. There are certain reasons for that: the Russian jurisdiction is not exactly convenient in terms of establishing corporate relations between shareholders, and there is a 25% limit on depositary receipts. Also, there is a misconception, fueled by investment banks, that NASDAQ provides something on top of what the Moscow Exchange does — Sergey Shvetsov, First Deputy Governor, Bank of Russia .

A 25% limit on conversion of shares into depositary receipts restrains the inflow of trading activity

We introduced this 25% limit [on depositary receipts, – Ed.] many years ago. It was introduced for protection from the outflow of trading activity from the Russian market to foreign markets. <...> I think that the situation currently is that the limit rather constrains the inflow of trading activity into Russia, rather than prevents the outflow of trading activity from Russia — Sergey Shvetsov, First Deputy Governor, Bank of Russia .

Private investors’ discouragement is a risk

If we discourage our individual investors, we will see apathy of some sort — Sergey Shvetsov, First Deputy Governor, Bank of Russia .

The industry and the regulator have different views on the time frames for interaction with customers

The conflict between the industry and the regulator lies in time frames. The industry needs to make money here and now; we believe that the relationship with customers should be long-term — Sergey Shvetsov, First Deputy Governor, Bank of Russia .

Disregard for retail investors

Customers are not treated as if they could bring long-term income, make money with them on small commissions 20 years down the line. <...> You know how brokers used to say before: it does not matter how much clients pay if they do it long enough. For some reason, this has always been the attitude towards major institutional investors, and foreign ones especially, but never towards our retail investors — Alexey Moiseev, Deputy Finance Minister of the Russian Federation .

Insufficient equity capital in the early stages of business development

Establishing equity capital in the earlier stages of business development: this is what may be lacking even more than a good number of public companies and access to the public capital markets. <...> The irony is that the very international funds would buy into a public company with great pleasure — Alexei Yakovitsky, Global Chief Executive Officer, VTB Capital .

SOLUTIONS
Transition of private investors to professional solutions

A major part of people’s assets should be in products that are managed by professionals, where there is exceptional diversification, where a client’s risk profile and investment horizon are considered. <...> We believe that up to 50% of new clients, after they dive in at first, after they complete their initial education, should definitely turn to market tools under professional management — Dmitriy Panchenko, Investment Business Director, Tinkoff Bank.

Financial strategies should consider low customer activity

We see how the industry is being created today, we are at the very beginning of this process. <...> Perhaps, this is where we need to talk about a sustainable approach, where financial models would consider that clients do not frantically make hundreds of trades every day, but rather gradually shape out their investment portfolios. Models should be designed so that a customer’s life cycle would be measured in years — Dmitriy Panchenko, Investment Business Director, Tinkoff Bank.

Providing broader access to markets for Russian investors

Russian investors – retail ones, first of all – should be on an equal footing with foreign ones in terms of opportunities to participate in the most exciting deals on the market. <...> It seems very important to me that all market participants should ensure that Russian retail investors have the same opportunities to get good allocations in good deals, so that those investors make money, so that they have a positive experience, so that they are not only educated – albeit education is very important – so that they do not just learn it in theory but get initial positive experience from participation. <...> It is necessary to protect and cherish Russian investors, to help the newcomer retail investors evolve, so that they have a positive experience — Alexei Yakovitsky, Global Chief Executive Officer, VTB Capital .

Educating private investors to understand the risk

Right now, we do not need individual investors to know the multiples. We need them to understand the risk, to learn that reward comes with additional risk. <...> We need to teach them, talk to them, tell them not only where they should invest their money, but what risk they bear and how much they could lose. Because a professional trader does not day-trade in their own portfolio. Day-trading is the way to lose everything — Andrey Shemetov, Senior Vice President, Head of SberCIB, Sberbank.

The most important thing is that in the future investors clearly understand the rules for their investments. <...> It is the right thing to do to advise an investor that the long-term investment with the right strategy ensure income that beats inflation and deposit interest rates, which is very important. This year the Moscow Exchange <...> launched <...> a training programme for individual investors. It is called ‘Investor Path’. <...> If we have more competent investors, we thereby have more successful investors and enable the industry’s further growth — Yuriy Denisov, Chairman of the Management Board, Moscow Exchange.

Eliminating restrictions that encourage dual listing, such as the limit on converting shares into depositary receipts

Restrictions need to be lifted. Together with the Government, we have plans to reconsider how we treat the voting rights of investors who hold different classes of stock. I am talking about limitations on preferred stock, dual-class shares – lots of things. We consistently advocate that a common share should be standardized, but preferred shares should be open for creative approach. Preferred stock may carry regular voting rights, or more voting rights, or no voting rights at all. The only thing that we think is important is that the dividend on preferred stock cannot be less than on common stock. <...> We have created a special working group on long-term financing, where IPOs are a priority. We should have this regulation released soon enough. I hope this will increase the Russian companies’ desire to go public on the Moscow Exchange, and perhaps only on the Moscow Exchange — Sergey Shvetsov, First Deputy Governor, Bank of Russia .

Creating simple investment strategies for individual investors who join the market

Individual investors need simple strategies at first, because if we give them complex strategies or offer them to make choices for themselves, statistically they are going to fail as non-professionals. Therefore, cheap index tracking is probably what should be widespread. Although, perhaps, this is not as immediately profitable for brokers as active trading — Sergey Shvetsov, First Deputy Governor, Bank of Russia .

Promoting long-term strategies for passive investment and collective investments for individuals

The stock market positively allows investors to make more than with bank deposits if they are willing to invest long-term. So, we have to prove that this is the case on a horizon of 5 to 10 years. Brokers should promote this idea and offer working strategies for passive investment — Sergey Shvetsov, First Deputy Governor, Bank of Russia .

Passive collective investment, index trackers, are, of course, what we should target people to — Alexey Moiseev, Deputy Finance Minister of the Russian Federation .