Investment opportunities in the rebound from the initial Covid market crash in March 2020 succeeded in solving a problem that policy makers and brokers could not for years.
Russians are, finally, moving increasing amounts of savings to capital markets from high-yield bank deposits or real estate. The only concern is that players don’t fully understand the risks.
Russia’s main exchanges have been at the epicentre of this retail investor boom.
Arguably none more so than the SPB Exchange, which as Russia’s leading foreign stocks trading platform, saw its trading volume increase tenfold over the course of 2020. Founded in 1997, the bourse was until last year the only exchange allowing investors to trade international securities in the country. It now boasts 12.2 million registered client accounts, thanks to heightened demand for international stocks. All of this has reflected positively on the exchange’s financials, with the bourse seeing net profit jump by 4.4 times to RUB 1.5 billion in the first half of this year.
The market bounce has come with a tidal wave of new brokerage registrations and a new era in which investment shows featured on primetime TV and personal finance bloggers hold a certain celebrity status. The dynamic solved problems with participation that policy makers and brokers had been unable to crack for years.
Several factors collided to prompt this rapid u-turn: cash savings became less attractive whilse investing was made easier. Not only did the central bank lower its base rate to 4.25% in July 2020 – its lowest level since the end of the Soviet Union – but cash savings were made even less attractive by the introduction of taxes on bank deposits at the start of 2021. The relaxation of investment account opening rules a year prior also provoked an increase in digital innovation in the sector.
This significant uptick in the retail investor base was driven largely by the younger generation who, according to analysts, have typically been more attracted to international equities. But international equities have also grown in popularity among older investors due to the greater diversity they provide versus domestic market offerings and the FX hedging they offer against a weakening rouble.
Recognizing the importance of international equities to the growing retail investor base, the Moscow Exchange last week announced plans to list more than 2,500 foreign equities (including c. 100 ETFs) by the end of 2023, up from the 281 stocks it offered at the end of August. The SPB Exchange, in comparison, traded 1,817 international securities as of June 30, 2021 – nine times more than MOEX.
With the number of retail investors rising so rapidly, both the SPB and Moscow exchanges, as well as capital market regulators, now face a growing responsibility to ensure that retail investors have the necessary financial understanding and disclosure information to make prudent personal finance decisions.
“There is a lot of concern in the professional community that so many people are investing in capital markets without necessarily understanding what they’re doing,” said Andrey Braginsky, a spokesperson for the Moscow Exchange, in an interview with Euromoney earlier this year. “Many of them have only seen markets go up and may not realize the potential downsides.”
The financial community is particularly concerned that almost all new retail investors have opted to make direct investments, with the ratio of money invested directly to that independently asset managed standing at 1:1 compared to 1:6 in the US.
On a federal level, the Central Bank of Russia (CBR) has approved new investor protection legislation that will come into force in October 2021. It aims to ensure that retail investors understand both why they are investing and what they can realistically expect from their investments. As part of this, banks and brokers will be legally obligated to provide more detailed information on investment products for retail clients, including providing them with an assessment of the riskiness of certain instruments against a CBR-devised classification scheme. It will aslo administer tests to ensure that investors understand the risks associated with the investment products they have selected.
There will also be greater restrictions placed on the range of investments accessible to “non-qualified” investors, for example, limiting investments in more complex instruments such as margin trading, structured products and derivatives.
The country’s leading exchanges have played an integral role in these investor protection efforts. The Moscow Exchange has partnered with the CB to develop a comprehensive online programme to financially educate retail investors. Meanwhile, the SPB Exchange has launched its own dedicated educational centre for new traders aiming to equip them with the knowledge and practical skills to develop successful trading strategies in cooperation with major brokerages.
It’s not just the major exchanges who are concerned about investor protection, though – digital brokerages are also playing their part. For example, Tinkoff Investments enables clients to select a specific risk profile and receive alerts if a prospective investment falls outside of these limits. Tinkoff also offers a host of educational materials ranging from a dedicated Youtube channel entitled “Money Doesn’t Sleep” to an investing guide complete with short quizzes to enhance users’ financial acumen.
With the shift towards retail investing is still in its relative infancy – only about 7.6% of Russian adults currently have a brokerage account – there is every likelihood that investor protection will be a hot topic for a long time to come. It will be critically important that all of these institutions continue to be proactive in their efforts to ensure that market newcomers do not turn away from investing forever at the first sign of a reversal in the current bull market.