Many Ukrainians will start investing into securities since there's no alternative: either a 15 percent CD's from banks or 30-40 percent from investing into securities
In Soviet Ukraine, citizens never learned how to invest their earnings. The state provided citizens with meager salaries, just enough for people to support themselves and function in the Soviet state machine.
What money wasn’t spent on basic staples could have been deposited with the Soviet State Savings Bank, which offered accountholders a maximum 3 percent annual interest, but other investment options, like securities, simply did not exist.
Even today, as capitalist principles increasingly drive Ukraine’s economy, many citizens, who just 10 years ago resorted to hiding money around the house rather than entrusting it to banks, still see savings deposits (which they increasingly trust) and real estate as their only investment vehicles.
That is beginning to change.
Many Ukrainians will start actively investing into securities since “they do not have much of an alternative: either to get 15 percent annual interest from banks or 30-40 percent from investing into securities,” said Yuriy Fedorchenko, an analyst at Kyiv’s On-line Capital.
Putting money to work
Market analysts and professionals believe 2008 will be a breakthrough year for the securities market, with thousands of Ukrainians starting to invest. In anticipation, brokers have launched new investment funds targeting Ukrainian citizens in the past year, joining their portfolio of funds traditionally backed by Western portfolio investors.
In Ukraine, the ratio of those who keep their money in banks compared to those who invest in securities is 99 to 1, according to the Ukrainian Association of Investment Business (UAIB), a non-government, non-profit organization of stock market investors. In the developed world, people generally invest one-third of their earnings into securities, another third into real estate, and the remaining third is kept in bank deposits, gold, and other instruments.
The majority of Ukrainians aren’t investing in investment funds and private pension funds for two reasons: lack of trust and information about the availability and purpose of such financial services; and an undeveloped network for providing such services, said UAIB Council Head Dmytro Leonov.
The securities fund services market is just taking off, Leonov said, and these funds’ history with Ukrainian clients “is not more than four years old.”
The number of securities funds (both venture and non-venture funds) have grown from six to 745 between March 2003 to September 2007, according to UAIB.
Of those funds, the top 10 manage about a quarter of all assets available on the market of investment institutions.
The number of asset management companies has grown from five in January 2003 to 290 by October 2007, revealing that the popularity of investment funds and non-state pension funds has increased significantly.
Also, the number of share capital investment funds and corporate investment funds, which are focused on attracting resources from Ukrainian citizens, has grown from 109 to 153 during the first nine months of 2007.
Other markets that used to offer lucrative returns, such as real estate, are peaking and don’t as offer as high a rate of return in a relatively short period of time, analysts said.
Returns on securities funds are riskier, but much higher than depositing money with banks or investing in precious metals.
During the first six months of 2007, the return on non-venture investment funds totaled 23 percent, according to UAIB. Bank deposits provided an average return of 6 percent, while the profitability of gold was only 2 percent.
People are more educated about the stock market and ways to invest in securities, said Tatiana Yelfimova, marketing department head of KINTO, a securities broker-dealer. Twice as many people are interested in investing in securities compared to last year, she estimated.
KINTO, which has five pension and nine investment funds under its management, saw the value of its assets surge from $139 million in May 2007 to $173 million in six months.
Citing recent market research, Yelfimova said while nine out of 10 people consider money a reward for their work, only one out of 10 sees money as an instrument to be put to work.
At the same time, “there are many people who have not heard about such possibilities and they’re only familiar with bank deposits and insurance,” Yelfimova said.
This is understandable, since the stock market is just beginning to develop, she added.
Private pension funds
Another investment option gaining ground is the pension fund, which is theoretically meant as an alternative to the state-run pension fund as a means for Ukrainians citizens to make long-term retirement investments.
However, average Ukrainians are entering this market tentatively.
“So far, the main driving force and participants in non-state pension funds are enterprises that make payments into the funds for the benefit of their employees,” Leonov said.
Almost 94 percent of the money in non-state pension funds was received from businesses last year, according to UAIB.
But as figures attest, this trend is slowly on the upside.
The number of private pension funds has grown from 54 to 91 between 2005 and September 2007, according to UAIB. And the number of individuals participating in private pension funds increased from almost 35,000 to 193,000 between April 2005 and April 2007.
Ukrainians form a mental block with respect to non-state pension funds “since the word ‘pension’ has been associated with the word ‘state’ in our citizens’ consciousness,” Leonov said.
In general, “changing the mindset of a financial services consumer is a lengthy process,” he added.
In his view, the state should conduct an effective public awareness campaign to make non-state pension funds more attractive for Ukrainians.
Stock market boom
The surge in individual investors has been occurring in step with the development of Ukraine’s stock market.
Despite an expected slowdown of the stock market’s growth last year, it continues to grow and offer higher investment returns compared to bank deposits, analysts said.
Undeterred by political turmoil, the Ukrainian stock market grew in 2007 by a record 135 percent, ranking its growth second in the world behind China. Last year’s trade volume was $1.9 billion on PFTS, Ukraine’s top stock trading platform.
“The Ukrainian stock market has grown radically,” said Andriy Bespyatov, head of research at Kyiv-based Dragon Capital, a leading securities brokerage and investment banking firm.
Market capitalization has risen 11-fold since 2004, he said, trade turnover is 15 times higher and the number of companies being traded has mushroomed by a factor of 10 in three years, he said.
Growth is a result of the entry of large foreign investment funds, the appearance of local mutual funds, strong economic growth, improving transparency, profitability and still many undiscovered and undervalued stocks, analysts said.
“Even the recent global mortgage crisis practically didn’t affect the Ukrainian stock market, because the low liquidity and internal support on the side of investment funds were the main supporting factors”, said Constantine Lisnychyy, the managing director of international sales and new marketsat Sokrat, a brokerage and transactions advisory firm.
According to Sokrat’s conservative prognosis, the value of PFTS will grow 37.5 percent this year, based on estimates of potential asset growth. Optimistically, the Ukrainian stock market may grow as much as between 60 and 80 percent.
“The first half of 2008 will be affected by the consequences of mortgage crisis connected with poor results of global financial sector players,” Lisnychyy said.
“But as the external volatility declines, the inflow of western investments will pick up pace.”
The shares of 335 companies are currently traded on Ukraine’s PFTS, according to Lisnychyy.
“We expect a high interest in still-undervalued metallurgical assets, as well as the energy and machine-building sectors in 2008,” Lisnychyy said. “Interest in the stock market by international players will be stimulated by new private placements and IPOs, the appearance of new players of the second echelon and privatization.”
Ukrainian legislators are expected to adopt a long-expected corporate governance law to tighten transparency requirements for Ukrainian companies wanting to be listed on PFTS.
This will eventually lead to an expansion of Ukraine’s stock market, especially in anticipation of IPOs of such large industrial groups as Metinvest, Interpipe and ISD Group scheduled for 2008-2009, experts said.
Considering the hryvnia will appreciate against the US dollar soon, investing in hryvnias in the Ukrainian stock market will be a promising alternative to keeping green bills in bank deposits, experts said.
