Curbing the investment tsunami

2022 becomes a year of the investment boom in activity of Ukrainians. Banks compete to add options and features to their mobile applications that make it easier for individuals to trade in foreign (stocks) shares by competing for the client with investment companies. “Trading in smartphone” will allow more than 1 million Ukrainians to become investors in the coming years.

Times when investing in foreign shares was possible only with an e-limit and direct service from a foreign broker, are gone. Nowadays, you can become a shareholder of Apple and Tesla in just a few seconds – more and more banks start to offer this service to customers through mobile applications.

New investment opportunities are emerging for Ukrainians at that time when sales in the global stock market, caused by the expected strengthening of monetary policy of the US Federal Reserve and the military threat from russia, are the largest in recent years. The sharp falling of stock prices – many international companies have lost more than 50% of their value – gives potential investors a sense of the benefits of impulsive entry into falling assets. But it is important to remember that any investment decisions must be carefully considered.

Two ways

Players entering this market choose one of two models of working with stocks – dealership or sub-brokerage. Alfa-Bank, which was the first among banks to open access to individuals to invest in foreign stocks (shares) – through the mobile application Sense SuperApp (test trading started on December 28 – all customers of the bank gained access on January 10), chose a dealer scheme. What does it mean?

The Ukrainian bank buys on its balance the securities of foreign issuers, the circulation of which in the Ukrainian market has been allowed by the regulator – the National Securities and Stock Market Commission. It means that the securities are with an investment rating not lower than BBB – currently there are shares of 30 companies in the application.

After that, the client carries out operations of purchase and sale of shares with the bank directly without intermediaries in the form of foreign brokers and exchanges. Purchased shares are credited to the client’s personal securities account, which is opened in the depository institution of Alfa-Bank.

“A client is the owner of securities only if he has an account statement that he owns specific securities. Our model allows you to obtain such a statement from the depository, as the securities are in the client’s account. These securities can be sold, presented (donated), inherited”, the press service of Alfa-Bank informed.

This model does not require to get an e-limit, as the transactions take place within the country: although the value of shares is tied to stock quotes and is denominated in dollars, they are bought for hryvnia at the exchange rate of Alfa-Bank. Binding to stock quotes limits trading time – only on weekdays from 16:30 to 23:00, while US stock exchanges are open.

At the same time, the brokerage model of work allows to include new functionality in the already existing banking application. “We wanted to create such a model that would allow us to conduct all operations within one mobile application. If you work through a broker, you need to create a separate application, because it is difficult to integrate different systems and platforms”, the press service said.

Alfa-Bank does not disclose the number of customers who have already bought shares through the Sense.

The developers of the Monobank application followed a sub-brokerage scheme. They created a separate mono invest application and signed a contract with a foreign broker Exante. On January 24, through it the mono team began to satisfy the requests of Ukrainian clients of Universal Bank for the purchase and sale of shares of hundreds of companies included in the S&P 500 index, as well as investment in 14 index funds, including ETFs is available.

Transactions under this model are carried out abroad, so the brokerage account replenishment requires getting an e-limit (limited to 200 thousand euros per year), with confirmation of the source of funds, and foreign currency replenishment of the Exante trading account. This procedure should be simple. “You won’t even notice how we will issue you an e-limit while you update your account in the application and choose which shares to buy”, Oleh Horokhovskyi co-founder of the Monobank application, says.

As of February 9, 20,000 Universal Bank customers have already purchased shares through mono invest. According to Oleh Horokhovskyi’s forecasts, there should be 100,000 investors by mid-March.

The shares bought by Ukrainians are in the account of a foreign broker, who keeps them in favor of the Ukrainian sub-broker, who, in turn, keeps them in favor of his clients.

“Initially, we lost more than three months waiting for the application to be approved in Interactive Brokers, and they refused us. Then we switched to the online broker Exante and rewrote everything from scratch”, Oleh Horokhovskyi says. Under this scheme, it is more difficult for Ukrainians to confirm ownership of securities held in Exante than even if they opened an brokerage account directly with Exante by e-limit, bypassing the Ukrainian broker – intermediary.

This is the risk of such investment scheme. “Working on a sub-brokerage scheme requires a special choice of partner. As practice shows, big brokers do not want to contact us. The same Interactive Brokers refused to cooperate with many people – he had many questions concerning confirming income. Therefore, the only way out is to go to small players, to whom you actually pass all your clients. At some point you realize that your business is bigger than the business of this broker. Are you ready to entrust your clients to him? And what will happen if something happens to the broker?” – one of the market participants explained the difference of approaches.

According to Oleksandr Kulikov, CEO of Green Candle Finance, there are potentially more risks when working through a sub-broker. “Any additional link brings its own risk, especially with long-term investments. It all depends on the quality of the sub-broker. Plus, due to changes in approaches to KYC from foreign investment firms, there may be a situation with the closure of the opportunity to work”, warns Oleksandr Kulikov.

In both models, the main costs for customers are commissions, which are paid for each transaction separately: both when buying and selling securities. Investors will have to pay 0.3-0.4% for each transaction.

The Ukrainian bank through which clients invest is a tax agent and will collect 18% personal income tax and 1.5% military tax on received investment income either on the basis of each agreement (dealer scheme) or at the time of withdrawal from a brokerage account or for results of the year (sub-brokerage scheme). However, individuals under any investment scheme still must submit on their own a declaration to the State Tax Service by the end of the year. Moreover, both investment and exchange rate income are subject to taxation.

In case of receiving dividends abroad, 9% of the personal income tax and 1.5% of the military fee must be paid: in the case of a dealer scheme, payment is made automatically, in the case of a sub-brokerage scheme, the client pays. At the same time there is double taxation – 30% of dividends are written off in the United States. If an individual is able to obtain documentary proof of payment of this 30% in the United States, so 9% of income will not have to be paid in Ukraine.

“Alfa-Bank loses to Monobank by the number of securities available for purchase, but is ready to bring (introduce) new issuers. We constantly receive feedback from our clients – what securities they want to see in their portfolio. We have already submitted documents to the regulator for the admission of new shares”, Andrii Rudenko, Head of the Unit of Securities and Foreign Markets of the Alfa-Bank, said.

The other players will actually choose between two models when entering the foreign investment equity market. However, there is no perfect model – each of them combines different pros and cons. Oleksandr Kulikov notes that the undoubted advantage of working through a sub-broker is liquidity and a large list of available tools. “At the same time, when buying securities in Ukraine, you have more storage options, potentially higher reliability, but a smaller list of available securities”, he added.

The regulator expects to increase the number of market players. “Ukrainians are now interested in how to invest in securities. There are more and more offers on the online investment market every day. And the more offers, the higher the quality of the product and service, – Ruslan Magomedov, the Chairman of the NSSMC, says. – I hope that the trend of activating private investors will not only restore the interest of large market participants, but also contribute to the development of stock instruments. A certain pool of players is already working, we are waiting for its expansion.”

Not only shares

The stock market does not end on stocks – there are many different investment instruments to which Ukrainian investors have already gained access or will soon have access. “Our model allows us to launch domestic government loan bonds (IGLBs) trading in a few months. The next step is to offer customers the opportunity to buy Eurobonds. We have already received such inquiries”, Andrii Rudenko from Alfa-Bank says.

Just in 2021, individuals increased their investments in IGLBs by UAH 14.1 billion. State-owned banks relied on IGLBs trading. In 2020, PrivatBank launched the purchase and sale of IGLBs at Privat24. Ukrgasbank is preparing to include a similar service in its application. “In the near future, updated version of the mobile application “ECObank” will be launched with the ability to submit applications for the purchase of IGLBs at auctions of the Ministry of Finance. Further, we plan to add the purchase of other securities, including foreign issuers”, Oleh Kyrychenko, Director of the Investment Department of Ukrgasbank, said

For now, in ECObank you can only view information on previously purchased IGLBs, but the functionality will be expanded – there will be a calculator that will help calculate the return on investment and associated costs. “We plan to realize the opportunity to open securities accounts, submit applications for the purchase or sale of securities, order bank quotes, etc. without visiting the bank”, Oleh Kyrychenko said.

The First Ukrainian International Bank (FUIB) also wants to simplify the purchase of foreign shares. “In the near future, FUIB plans to launch a pilot – a SWIFT payment service to a broker in the United States for the purchase / sale of securities on the US stock market through the application of a partner company. There will be a sub-brokerage sales model with a broker from the USA”, Oleksandr Shcherbakha, Director of Sales and Retail Development Department of the FUIB, said.

PrivatBank sees that they are losing the race for investment clients, so they are also preparing new services. But they do not comment on what project they are working on.

Oleksii Sukhorukov, Development Director of the Ukrainian Stock Exchange, notes that all the applications existing now are at an early stage of development. “And this is a normal approach – to start with the minimum viable product, which provides only the basic most necessary functionality”, – Oleksii Sukhorukov said.

At the moment, all players have a «starting position», and it is too early to analyze the functionality provided to customers, says Oleksandr Kulikov. “It is necessary to make aslice based on the results of the year of operation. Many tricks will not be added in the first releases. At the moment, we can clearly say that all interfaces are very simple and convenient for investor-beginner”, Oleksandr Kulikov said.

The main target audience of new investment opportunities is the middle class. Alfa-Bank says that the average portfolio of their clients is UAH 50,000. The creators of mono invest “aim” at an audience that is willing to invest up to $ 30,000 in securities.

According to Oleksii Sukhorukov, the main problems that hamper the development of the Ukrainian stock market and pushing private investors to invest in foreign securities, there are lack of “carrots”, unnecessary restrictions, prohibitions and regular violations of investors’ rights, which drive them to clearer and simpler jurisdictions. “The Ukrainian stock market continues to degrade. Our state apparatus (government) has already pushed foreign investors out of the market and continues to push out the remnants of domestic ones. Foreign securities are the only chance for the revival of the market”, he said.

At the same time, the IPO of large companies will become possible inside Ukraine only when the amount of assets in brokerage accounts in the country reaches at least $ 10 billion. “And for this, there must be several million of  such accounts. This is unattainable without foreign securities and tax motivation for long-term investments”, Oleksii Sukhorukov said.

Banks that enter this market are to some extent in the role of “catching up”, as investment companies long time have offered customers various ways to invest abroad. It’s just for now this process has been simplified as much as possible, in particular due to the emergence of convenient applications for smartphones. Dragon Capital bought company Treeum last year, which had the Wotan application, which allows trading through Interactive Brokers, and is now preparing to launch the Multi Invest application. ICU trades IGLBs through ICU Trade. Freedom Finance has a Tradernet application.

Concorde Capital, Green Candle and Blackshield Capital have plans to create their own applications. Players rely on three main segments: Ukrainian government bonds (IGLBs, Eurobonds), foreign stocks and ETF funds. Another area – cryptocurrency trading – will be implemented, looking back at regulators.

Ruslan Magomedov tests each new application. “I monitor and test mobile investment applications both professionally and in my own interest. Now all existing applications in Ukraine are displayed on a separate screen on my smartphone”, the Chairman of the NSSMC said.  

The more players in the market with new applications, the more practical experience gained by both traders and their customers, the higher pressure on government institutions – the NSSMC and the NBU – to remove regulatory restrictions. “The NSSMC listens to the participants` opinion and is ready to change regulations so that they can be worked on. Until June 2021, it was impossible to start normal sub-brokerage work at all, there was no NBU’s Resolution regulating e-limit work for Ukrainian professional participants and their clients”, Oleksandr Kulikov says.

The regulator promises to help market participants with the problems they have. “For me, these stories are not just about mobile applications, but about someone’s business, which has both profitable differences and “bottlenecks”. Besides, I’m not just watching new tools from the sidelines. Software products and licensing conditions are always connected, so when market participants come to us with them, we and Commissioners always study them carefully and give helpful advice”, Ruslan Magomedov said.

The more affordable investment becomes, the more people who are currently dissatisfied with low deposit rates will be attracted to the stock market. According to Oleksii Sukhorukov, the ease of connection and the possibility of buying foreign securities will attract a large number of new investors to the market. “It will increase the number of individual investors in the country by hundreds or even thousands of times. I am waiting for the first million accounts (bills) by the end of 2023”, Oleksii Sukhorukov says.

“Most of these people are financially illiterate and can suffer heavy losses. All markets are almost at highs and any “black swan” can lead to a domino effect. So it is important to remember that stock speculation (trying to buy stocks cheaper and soon selling them more expensive.\) – is a roulette wheel in which only the casino wins. If you really want to buy shares, I recommend considering these investments as a long-term investment, rather than easy earnings in a couple of days”, Oleg Horokhovskyi warned his clients.

Investment risks are reduced by diversification and the emphasis on long-term investments. “The most important thing among beginner investors is trying to avoid speculation. Unfortunately, as my practice has shown, this is one of the most disastrous decisions made by beginner investor”, Oleksandr Kulikov says.

The difficulty of investing is that you can lose not only on risky instruments such as stocks, but also on fixed income instruments. “The main problem is the admission of clients who do not understand what tools they are dealing with and what risks they have. Even the simplest IGLBs with a misunderstanding of the tool can lead to losses, and very serious. You can lose 50% of investments”, – Oleksandr Kulikov warns.

Author: Viktoria Rudenko

Source: FinClub