The Stock Renaissance: Ukrainians can buy shares now — will it help to create a full-fledged securities market

The stock market is both an old and a new topic for Ukraine. The old is because after the collapse of the USSR during the years of rapid privatization the employees of enterprises received vouchers for the purchase of shares, which the majority of them unknowingly exchanged for a little money without accident.

The new one is because everyone will be able to try himself as an investor in the American market since 2022, thanks to the fact that banks and financial institutions, such as Alfa Bank, Monobank, PUMB, Dragon Capital and others, add the possibility to buy shares for their clients, which may stimulate the development of the internal securities market.  The internal market mainly trades local loan bonds now, which is essentially government debt. However, there is business in Ukraine that is ready for the IPO. What does the surge of interest in stock trading mean and whether it will allow the internal stock market to rise – read the article in Delo.ua.

It can’t be said that Ukrainians could not trade shares of foreign companies until 2022. They could, but it was quite complicated. You can conclude an agreement with a foreign broker, for example with Interactive Brokers, by registering with your passport, then put money into your account via the SWIFT system and buy it. The shares are kept in the company’s depository, and the money is withdrawn through the same SWIFT. However, a number of problems arose here. Firstly, not everybody wants to trifle with registration; secondly, you have to pay taxes, carefully calculating the exchange adjustments at the moment of each transaction and other factors. Thirdly, if anything happens, you will have to study the USA legislation. Fourthly, it is necessary to register the e-limit in the National Bank (it is 200 thousand EUR per year from 2019), confirming the source of funds. That is, only motivated people came in.

The Fintech revolution happened in Ukraine at the end of 2021. The process became much easier, banks began to develop functionality in their applications, which gives almost anyone an opportunity to invest in shares.

“The value for the client is a simplified onboarding from the broker (because the client is verified and passed compliance from the bank), the bureaucracy with which discourages some clients. Also it (applications with the ability to invest) provide a simplified interface for the first steps in investing. Some will offer investment strategies and analytical support,” Konstiantyn Yakunenko, the Investment Analyst of Adamant Capital, said.

Is it all so simple for the investor and what schemes are behind such services in applications? There are two main methods of work – dealer and brokerage. How they differ, we explain in a few bullet points.

The dealers – how it works

Alfa Bank of Ukraine was the first, launching trading in foreign shares in its digital bank Sense SuperApp. The trading for the project’s pilot group was launched on 28th of December in 2021. This, however, was preceded by a long preparation: the bank announced its intention on 6th of December, and before that initiated the admission to the Ukrainian market shares of international companies (such as Amazon, Caterpillar, Bank of Ameriсa, Chevron, Citigroup, Coca-Cola, Nike, Merck&Co, Paypal, PepsiCo, P&G, Starbucks and Pfizer Inc). The Regulator, the National Securities and Stock Market Commission (hereinafter the NSSMC) made Resolution on it on 28th of October and 4th of November in 2021.

There were more than 11 thousand people in the test group, and for a few hours clients had conducted 185 transactions with an average check of 8600 UAH and shares of Pfizer, Apple, Coca-Cola, Bank of America, Intel, Microsoft, Meta (Facebook) in the top.

This option became available to absolutely all clients in Sense SuperApp since the 10th of January. And after more than a month of work Ukrainians traded for 136 million UAH. The average portfolio of the investor consisted of shares of 3-4 companies to the amount of about 50 thousand UAH. The maximum number of shares, purchased by one investor, was 450 shares for 2,7 million UAH. During this time, the bank had time to hear the clients’ suggestions and to make a single exchange rate, so as not to lose on the exchange rate difference during active trading.

Alfa Bank is currently the only market player that uses a dealer scheme.

This means that the bank buys shares of companies on the American Stock Exchange, brings them into Ukraine and sells them to its client at the American exchange price. The transaction is made in hryvnia, and within the country also, which means no e-limit or SWIFT. In this case, only the bank’s commission is paid, which is not charged until March 1, 2022, but not both the bank and the sub-broker.

The fact that shares are “physically” in Ukraine, in other words the shares are registered and are on the client’s account in the Depository of Ukraine. This allows its disposing the same as any other property: to present, to inherit, to change the depository. The legal confirmation of a client’s right of ownership for purchased shares is a statement on a securities account. The bank sends such a statement to the client at the end of the trading session, if the client has made a purchase or sale transaction. Besides, the money on the client’s account in the bank is insured by the State Deposit Guarantee Fund up to 200 thousand UAH.

The bank also acts as a tax agent – that is, it automatically withholds and pays taxes from investment income when selling shares. The rate is 18% of personal income tax and 1.5% of the tax levy.

Regarding dividends, the bank also acts as a tax agent, the tax rate here is lower – 9% of personal income tax + 1.5% of the military levy. At the same time, the results of investment activities (profits and losses) must be specified in the tax declaration at the end of the year.

The bank trades during the working hours of the American Stock Exchange (working days from 4:30 p.m. to 11 p.m.) and you can buy at least one share.

Here, however, there is also a constraining factor: you can buy securities that are allowed to be traded in Ukraine. However, there are quite a few of them: here are the leaders of categories, from technology to pharmaceuticals, all with a rating not lower than BBB. Alfa Bank promises to expand the instruments: now they are attracting shares, which are advised by participants of the community, and in the future they will open the possibility of trading local loan bonds and repurchase agreement – the securities with the obligation of repurchase. “Our task is to promote the development of the internal stock market among other things,” the bank reports. “And in the future to open trading in Ukrainian instruments 24/7”.

The brokers – how it works

The rest of the market players chose the sub-broker scheme – that is, they conclude contracts with foreign brokers who are either admitted to trading on the American Stock Exchange or have contracts with such brokers.

Monobank launched the share trading in a trial version from the 1st of February. The option will be available to everyone from March. The fee is 0.3% (minimum $1) of the purchase/sale transaction amount, and a promotional rate of 0.01% is in effect until the 1st of April. The quotes are in online mode. The trading sessions are held on working days from 4:30 p.m. to 11 p.m.

Mr. Horokhovskyi said that he had been waiting three months for the approval of the application by Interactive Brokers, but was rejected. After that monobank decided to cooperate with the Cypriot-Russian online broker Exante.

“We will be able to buy all securities from the S&P500 list at the start and some of the most popular ETF (Exchange Traded Fund, – Delo.ua) from the 1st of February,” Mr. Horokhovskyi added.

As Anatolii Rohalskyi, the Chief Marketing Officer of Monobank, told, they have received about 250 thousand applications from clients to test the application since December. “There are many prerequisites for this. First, the world stock exchange indices are at their historical highs. The ongoing news about the continued rise in quotations increases clients’ interest. On the other hand, the low interest rates on deposits (especially in currencies) encourage clients to look for more attractive opportunities for depositing money,” Rohalskyi says.

According to him, if the client made a profit on the exchange, the bank will also act as a tax agent when withdrawing it. The nominee holder of the securities will be Universal Bank, which will give a statement on the securities account from its depository.

But there are nuances. The shares will be kept in the interests of the client on the account of a foreign broker, with whom the Ukrainian bank will cooperate. That is, these shares will not be in Ukraine and in case of force majeure the broker will have to prove his right of ownership or inheritance.

A small force majeure has already happened at monobank. “On the 1st of February, the profit of all investors of mono invest on their portfolio of about 2.4 million USD was 70,231 USD. At the end of yesterday’s trading session, the current total loss of all investors on their portfolios is 8907 USD. This is, perhaps, the most important thing to know about investing,” Oleh Horokhovskyi wrote. In turn, the mono invest group reported problems of the broker itself, Exante, due to which the trade was put on technical maintenance and the users could not sell their shares when their value began to fall sharply, in particular, when the shares of Meta (Facebook) fell by 22% at that time.

PUMB will also use the sub-brokerage scheme. “The implementation of this service will be available to our clients through a separate application of the partner company. We plan to launch it in February 2022. The beta-testing is already in progress,” Oleksander Shcherbakha, the Director of Sales and Retail Business Development Department of PUMB, told us. According to him the bank signed a contract with an American broker, the clients will be able to buy all types of securities of the USA, and their own account will be automatically opened in an American partner bank.

The stock market: a multiplier for which everyone is ready

However, the conditions are not bad enough now to pay attention to the development of our own stock market, for a number of reasons. It is quite difficult to open a business in an unstable situation. According to Maksym Tiutiunnykov, the Chairman of the Small and Medium-Sized Business Association, the young people with entrepreneurial skills and with new ideas don’t want to risk their money. “The small and medium-sized business, in turn, is afraid to expand, open branches or even stop or shut down its activities,” Mr. Tiutiunnykov said.

At the same time, there is a certain outflow of foreign investors. At this point, an instrument for raising funds from a small internal investor could work, which, on the one hand, would allow the business to develop and, on the other hand, the people would have an opportunity to make savings for themselves.

The interest of the audience in new instruments for investing is confirmed by the statistics of the Sense app from the 28th of December to the 21st of January: the average age of the clients was 37 years old, and 60% fell into the age category of 30-45 years old. 87% were men.

According to Konstiantyn Yakunenko, at present, the stock market of Ukraine can not be called, in the global sense, a classic instrument for attracting capital by Ukrainian companies. “The Ukrainian stock market is characterized by a small number of companies, mostly not innovative; the low shares in their free trading, that is, investors do not have a real impact on companies. There are practically no institutional investors, the large capital with a long planning horizon, for example pension funds or hedge funds,” the expert says.

Vadym Shekman, the Chief Operations Officer of Dobrobut, is sure that Ukrainian business will gladly go for an internal IPO in order to attract funds for development, if all the necessary conditions appear.

“I wish that investments in financial markets would increase in Ukraine. From a business point of view, this is the most effective way to grow, if you need capital. That’s why companies in the USA are developing. You (as an investor – Delo.ua) have an opportunity for start-ups to raise capital. You have the opportunity to save money for your retirement. Do not just buy an apartment or put it under your mattress, but invest it and expect growth. This is a multiplier of the economy, which is absent in Ukraine today. But so it seems to me that sooner or later it will appear”, the businessman says.

As an example that smaller investors, in other words, the people want to invest and earn, Shekman presents the “people’s IPO”, which Igor Mazepa, the General Director of Concord Capital, brought for the Rivne FC “Veres” 35.7 million for the first day on the exchange and more than a thousand applications for shares from individuals.

The business, in turn, is ready. “If the goal of the State is to develop the Ukrainian economy, the stock market should be one of the main tasks in 2022-2023,” the top manager emphasizes. “Ideally, there should be an investment market in which such companies as ROZETKA, Nova Poshta, and Dobrobut, for example, could participate, or enter the IPO.  So that people who saved money in Ukraine, and created some capital, would have an option to invest in different Ukrainian companies”.

In addition to the IPO, experts say that issuing corporate debt bonds, which can be bought by small Ukrainian investors, will help develop the stock market. 

The growing interest of Ukrainian investors is also confirmed by the Regulator of Securities Market. “Fortunately, Ukrainians are really now interested in how to invest exactly in securities. Every day the offerings in the online investment market are increasing. And the more offerings there are, the higher quality of the product and service is. After all, along with offers, the competition for the client grows as well. And when competition grows, the business tries to offer the best conditions. And then there is quality in the market. I hope this trend of increased activity of private investors will not only restore interest of major market players, but also contribute to the development of stock instruments. A certain pool of players is already working and we expect their expansion,” Ruslan Magomedov, the Chairman of the NSSMC, is sure.

Currently, there are 91 companies registered for internal trading in Ukraine. In particular, eurobonds and shares of metallurgical, energy and agricultural companies such as Metinvest B.V., FERREXPO PLC, MHP S.A., DTEK RENEWABLES FINANCE B.V. were emitted. Quite a number of securities of foreign companies, such as ALPHABET INC., AMAZON.COM, INC., CATERPILLAR INC., BANK OF AMERICA CORPORATION, THE COCA-COLA COMPANY are also admitted to trading.

A complete list is available on the Regulator’s website.

However, Ukraine’s government debt is mainly traded on the exchange, and market makers do it. In 2021, the total volume of trading on the PFTS stock exchange amounted to 221.6 billion UAH (+167% compared to 2020). But 98.3% of this is government bonds. Another 0.8% are municipal bonds, 0.7% are corporate bonds, and only one percent of the volume is represented by shares.

Dmytro Bunetskyi, special correspondent of delo.ua

Source: delo.ua