20-25% per annum in dollar. Why do Ukrainians buy shares of foreign companies

Ukrainians have begun to think more often about the purchase of foreign securities. This is not a boom or a mass demand yet, but the interest of the population is growing.

“The trend began in April 2020, when individuals became much more likely to open brokerage accounts in the world, and had continued in 2021. All professional market participants are experiencing this tendency. More and more people, especially youth, are thinking about their finances, investment opportunities and passive income. First of all, they have the opportunity to invest in the stock market,” told Taras Handzii, an expert of Freedom Finance Ukraine, to the Ministry of Finance.

The increased interest in foreign securities is encouraged by various reasons:

– In February 2021 the National Bank has doubled the electronic limit for individuals on foreign investments — from 100,000 EUR to 200,000 EUR per year;

– The constant expansion by the National Securities and Stock Market Commission of the list of securities admitted to the trading in Ukraine.

The emergence of Ukrainian banks on this market. The NBU allowed them to act as brokers on the international markets and buy securities on behalf of clients from June 29, 2021 (the Resolution №62).

The profitability of deposits in domestic banks has decreased: the average rate on hryvnia deposits is now kept at 8.76%, on dollar deposits — 1%, euro — 0.45%.

The financial literacy of the population is growing. And the less people pay for classic deposits, the more active they think about the alternative investments, including investments in securities.

In response to a request from the Ministry of Finance, the National Bank of Ukraine reported that the number of foreign exchange transactions within the electronic limits of the Ukrainians has increased by one and a half times: from 33.1 thousand transactions for the entire year 2020 to 50.6 thousand transactions for 10 months of 2021. In January-October this year, 22.1 thousand people made foreign currency transfers abroad within the electronic limits for a total amount of 540.2 million USD. The NBU calculated that an average of 4.1 thousand people used them per month.

Buy shares without stock exchanges

The first foreign securities began to allow for trading in our country five years ago. The list of such accreditations is constantly growing — now it includes 86 different types of shares and bonds.

As reported by the NSSMC to the Ministry of Finance, from the beginning of 2016 to November 2021, 2117 contracts for the purchase of foreign securities (securities) were concluded in Ukraine. Collectively, they invested 2.3 billion — for a 5-river volume is small.

People are just getting involved in the investment process, so they have less of these investments than they do in business.

The total amount of investments in foreign securities for 2016-2021, according to the NSSMC, was:

– individuals – 225 million UAH;

– non-resident legal entities – 503.3 million UAH;

– resident legal entities – 1.598 billion UAH.

However, the potential for the public is great, especially if financial institutions actively promote this service.

“The volume of transactions is growing with geometric progression. Although there is some caution when making the first transactions, because investments in securities are a new product. As a rule, the average check for investment in one asset is 20-25 thousand EUR. The maximum investment amount (according to the electronic limit) is 200,000 EUR” said Victoriia Myslyva, the Head of private banking at OTP Bank.

The foreign securities are bought in different ways — both on the stock exchange and from other representatives of the financial market: investment companies, banks, etc. There are small packages of securities trading on the stock exchanges: most are bought by different owners. Therefore, the Ukrainians often buy the foreign shares/bonds on the over-the-counter market from other owners.

This is confirmed by statistics for the last five years, which the Ministry of Finance received from the NSSMC:

– exchange market – 2017 contracts for 605 million UAH (about 300 thousand UAH per contract);

– over-the-counter market – 100 contracts for 1.721 billion UAH (17.2 million UAH per contract).

For the frequency of purchases the shares are leading, which are most often taken in small packages. But the largest amount of funds invested in bonds:

– shares of foreign issuers – 2015 contracts for 547 million UAH (almost 272 thousand UAH per contract);

– bonds of foreign issuers – 55 contracts for 642 million UAH (about 12 million UAH per contract);

– government bonds – 46 contracts for 1.137 billion UAH (about 25 million UAH per contract).

“For the most part, the clients are interested in Ukraine’s Sovereign Eurobonds, or shares of companies that everyone knows — Apple, Microsoft, Tesla and others,” Yevheniia Hryshchenko, the deputy director of the ICU group, told the Ministry of Finance.

“Our bank quotes the foreign government loan bonds of Ukraine and Eurobonds of Ukrainian companies, such as Naftogaz Ukraine, Metinvest, Kernel Holding, MHP SE, DTEK Renewables, Ukrainian Railway, Vodafone Ukraine, Ukravtodor, Oschad Bank, Ukreximbank for its clients. When buying Eurobonds, you should consider that the entry threshold is quite high — 200 thousand EUR. In addition, it is a long-term investment. If the client wants to invest in bonds for a period of less than 3 years, it is worth paying attention to the foreign currency domestic bonds,” Oleh Serdiuk, the Head of the Investment Activities Department of Ukreximbank, told the Ministry of Finance.

If we talk about the shares, most often people pay attention to the representatives of big businesses: the companies with large capitalizations.

“These are mostly the representatives of the technology sector or individual leaders from other sectors. We are talking about Microsoft, Alphabet, Apple, Meta Platforms, Amazon and Tesla. The special attention to them is primarily due to its strong brand, business and profitability, which have been truly impressive in recent years. Despite the large capitalization, the companies have grown by tens of percent per year”, said Taras Handzii.

Of course, it all depends on the strategy of each individual investor. Some invest exclusively in big brands that regularly pay dividends. And some are ready to take risks and invest in projects that are just starting out. The investment funds and banks usually advise to maintain a balance with the minimal risk: no more than 5-10% of risky companies or startups and 90-95% of verifies issuers.

The professional financiers advise people to refrain from making emotional purchases and not to invest on high-profile news that could turn into losses in the future.

“If Tesla shares have been rising over the past two years, that doesn’t mean that it’s going to become more expensive over the next two years. However, the most novice investors enter the market precisely because of the big noise about certain assets. At the same time, they often buy it near its peak levels. I am in favor of a more conscious approach,” Ivan Svitek, the Chairman of the Board of Unex Bank, said in a conversation with the Ministry of Finance.

How to start investing in securities

A person must conclude an agreement with an investment firm for buying shares or bonds of foreign issuers.

For the regular purchases should be concluded a general agreement or portfolio management agreement.

If the investor has completed the initial monitoring and provided basic documents, many services can be received using remote services — web pages or mobile applications.

“The NSSMC at the legislative level provided for the possibility of concluding contracts, the client’s submission of orders under such contracts, other interaction with the investment firm in various ways, including remote format. Of course, according to the requirements of financial monitoring, the verification and identification of the client is carried out, for example, by using BankID”, said Ruslan Magomedov, the Chairman of the National Securities and Stock Market Commission to the Ministry of Finance.

The financiers expect that financial institutions will offer people new mobile appss and technical solutions that allow to buy different securities as possible in a few clicks.

“The new tools are developing dynamically in Ukraine. An example is the launch of the Mobile Application of the Ministry of Finance and Dragon Capital announced in November. Although, of course, now a lot of banks and investment companies are working on the launch of similar financial technical instruments,” said Ivan Svitek.

A few years ago, in order to buy foreign securities, it was necessary to conclude contracts with foreign brokers and be serviced there. Now the investors are free to choose among the Ukrainian investment companies and banks that have received the appropriate permits and do the same. Currently, there are 193 financial institutions with the appropriate license (investment companies) in the NSSMC register, the full list is published on the website of the stock regulator.

Our financial institutions are trying to attract people to work through Ukrainian brokers. They have a number of advantages compared to foreign financial institutions:

– the documentary confirmation of the contract, which is electronically. This is confirmed by a report/statement (on the ownership of shares, bonds) in accordance with the legislation of Ukraine, not of another country.
– Розрахунок інвестиційного прибутку, сплата податків та декларування за людину проводить українська фінустанова. Наші інвестфірми/банки є податковими агентами — розраховують суму податків та сплачують від імені клієнта. У той час як при обслуговуванні іноземним брокером, людина це робить самостійно: веде облік інвестицій, подає податкову декларацію і не завжди має всі необхідні документи для розрахунку.

– The calculation of investment profits, payment of taxes and declaration for the person are carried out by the Ukrainian financial institution. Our investment firms/banks are tax agents — they calculate the amount of taxes and pay on behalf of the client. While when servicing a foreign broker, a person does it on his own: keeps the accounting of investments, submits a tax return and does not always have all the necessary documents for calculation.
– The inheritance of securities that can be issued by a domestic investment firm under the Ukrainian law (this differs from country to country, as does the inheritance taxation).

What do you need for investment

To buy foreign securities, a person needs four things:

– to open a bank account;

– to conclude a contract with an investment firm after prequalification: the client is referred to either qualified or unqualified investors;

– to open a securities account in the depositary, with which the investment firm usually helps;

– to obtain an electronic limit in the National Bank.

 “It takes from a few hours to 2-3 days to open an account. As a rule, it is free of charge. The further maintenance is also free, although there are brokers who have a monthly subscription fee,” said Taras Handzii.

The main expenses are:

– bank fees for transferring funds to a brokerage account (on average 0.5% of the amount);

– withdrawal commission for output (many brokers set a fixed fee);

– commissions for conclusion of contracts, depending on the tariff plan. For example, for novice investors it can be free of charge, and for active investors — 0.09% of the amount.

 “According to the Mifid requirements, we categorize the client, refer him to a professional investor or non-professional. Depending on the result, we conduct a consultation, determine the object of interest. The next step is to obtain the electronic limit of the NBU. Once these two steps are completed, the Treasury conducts a purchase transaction, which takes a few minutes”, explained Victoriia Myslyva.

In what to invest in 2022

By investing in shares of international companies, you can earn much more in dollars than by a deposit, where you should pay an average of 1%.

But you have to take a risk, because of investing in a central bank is not a guaranteed return like investing in bank deposits. If investments fail, you could lose the money.

“This market can bring 20-25% a year, and with such profit there will be always a risk. It can be minimized by differentiating the portfolio and choosing the right investment strategy,” Yurii Hrinenko, the Head of treasury operations at Credit Dnipro Bank, explained to the Ministry of Finance.

The maximum number of investments abroad for individuals is limited by the current electronic limit of the National Bank, which is now 200,000 EUR per year and 2 million EUR for legal entities. If we buy securities in Ukraine, there are no restrictions, but we also do not have the proper securities trading. That is, there is no liquid market where you can buy/sell the necessary share or bond at any time.

“The advantage of the investing in foreign securities is an investment in a currency asset, a kind of currency hedging. The disadvantages are a complicated procedure in foreign markets and limited liquidity of the instrument in the local market,” stressed Yevheniia Hryshchenko.

The experts give various advice on the most profitable areas for investment in 2022. The Ministry of Finance makes its prediction on the most promising industries:

– cybersecurity;

– developments taking into account Big Data;

– working on artificial intelligence;

– agricultural production;

– medicine;

– online retail;

– green energy; energy resources;

– new financial technologies.

 “In 2022, you should be extremely careful when choosing objects for investment. The cycle of easy money is already over. There are turbulent times when quality will win, not hype or technology,” Artem Shcherbyna, the Director of the Asset Management Department of Concorde Capital investment company, predicted to the Ministry of Finance.

Source: Мінфін