Stock Market of Ukraine: Obstacle Race

The gone year was rather successful for the national stock market. Thus, the total trades volume of the largest stock exchange of Ukraine First Securities Trading System (PFTS) has increased by 1,9 times during the year compared to the volume in 2005 and was UAH 27,63 billion. At the same time, unlike in the previous year, the increase was observed with respect to all securities traded by the First Securities Trading System. Besides, in the previous year a number of legal acts was adopted that are very important for the stock market, such as the Law of Ukraine “On Securities and Stock Exchange” and the Law of Ukraine "On Mortgage Bonds".

The reporter of LIGABusinessInform has interviewed Aleksandr Okhrimenko, Counsel of the Chairman of the Board of “Ukrgasbank” JSB, OJSC on the influence of these legal acts, as well as the challenges, which Ukrainian stock market faces this year.

What do you think of the Law of Ukraine “On Securities and Stock Exchange” as restated and amended? It seems to have a lot of conflicts...

First of all, I would like to point out that I would not consider the events, which happened in 2006on the Ukrainian stock market, as epoch-making or radical. In general, the market was developing more or less stable, without any rustle or convulsions. In my opinion, the last year’s adoption of the Law of Ukraine “On Securities and Stock Exchange” as restated and amended has introduced essential changes to the current market system.

There is a joke among the politicians: if you want to wait a little with the law - begin on the bylaws. Can we say that delay in adoption of the bylaws "contributes" to the stock market?

Yes, in fact, delay in adoption of the bylaws prevented enactment of the Law in full. Influence of this Law will be noticeable in the coming year, when all the legal documents will come into force and effect. If we try to describe the stock market of Ukraine in the last year, this process can be described as "evolutionary market development with positive tendencies".

Ukrainian stock market dealers pay special attention to the construction bonds. At the same time, there are a lot of speculations on the construction market. Can these securities protect the native investor? Do they have future?

In 2006 most important events happened on the Ukrainian bonds market. According to the results of 9 months of the year of 2006, corporate bonds were issued to the amount of over UAH 13 billion (in the year of 2005 corporate bonds were issued to the amount of UAH 12,7 billion). The major part out of the general volume of issue falls within target bonds issued for the purpose of construction financing. As a result of the fact that since January 2006 housing construction may be financed only with the help of target bonds and construction financing funds, such bonds were issued in large quantity. Most of these bonds were issued by Kyiv issuers. This reflects the main tendency of housing construction development in Ukraine. At the same time, a considerable amount of target bonds was issued in other cities, especially in Odessa, Dnipropetrovsk and Kharkov. The main reason for significant amount of the issued target bonds is the high profitability of the construction business.

Entering of big amount of target bonds to the Ukrainian stock market would be very welcomed in awaiting increase of market capitalization in general. But, unfortunately, target bonds, which are de jure a market instrument, remain de facto securities with a limited sphere of circulation. In most cases issuers of target bonds consider ably restrict their secondary turnover due to additional requirements to their re-registration. As a result, in spite of the fact that target bonds are an effective instrument for speculative transactions on the real estate market, as a rule, they to not circulate on the open market.

The purpose of target bonds has become mainly to accumulate funds for financing construction. This solves the problem of housing construction financing, but makes these financial instruments unattractive for the stock market.

At present people speak a lot about mortgage bonds. But just few of them are sure that the adopted Law of Ukraine "On Mortgage Bonds" will ensure their emerging and, most important, their turnover without fail. What do you think of the future of these securities?

Although the Law of Ukraine "On Mortgage Bonds" is adopted, in fact, these securities did not emerge on the market in 2006 because of delay in adoption of the bylaws. Therefore, in spite of the expansive growth of the construction market in 2006, the market of financial instruments, which are used in the effective turnover of the money flow on the mortgage financing market, is not developed yet. This is the task for the nearest future. It will be possible to create an effective method of constant capital raise on the construction market solely with the help of the target bonds entering open stock market. The target bonds must become an indicator of housing costs dynamics in the process of construction. Although in 2007 this problem will not be solved completely, still coping with it must be started. It is supposed that in 2007 target bonds issue volumes will increase even more due to widening of the territory of their use.

Can we speak of re-direction of the secondary corporate bonds market? Are the new speculators expected to emerge there?

The secondary interest bearing bonds market was successfully functioning in 2006, which can be proved by the trades’ results in these bonds at the First Securities Trading System. The compound PFTS-Cbonds for 2006 clearly show the positive tendency in development of the Ukrainian stock market. Even though, as any other market, it may face temporary stagnation and market decline. After all the achievement, the Ukrainian corporate bonds market remains less developed compared to the markets of Eastern Europe, not to mention Russia and Kazakhstan. It lacks interesting bonds issuers, as well as market participants. In 2006 insurance companies and non-governmental pension funds only began to demonstrate their interest in corporate bonds, but this is merely the beginning and time is needed to develop a good market. In 2007 the tendency of bonds issue by the commercial banks is expected to continue and may lead to appearance of interest bearing bonds for securitization of consumer loans of commercial banks. In the current year convertible bonds may enter the market. Possibly, the scope of corporate bonds issuers will widen among industrial companies. But still, in general, there is no overall re-orientation of industrial companies to the issue of bonds as an alternative for long-term credits.

On the secondary corporate bonds market the exchange rate of Hryvnya and Dollar will play a significant role. If Hryvnya falls compared to Dollar, no significant inflow of investors to the bonds market should be expected. Decrease of Hryvnya to a large extent has a negative impact on the bonds market. If Hryvnya will not decrease considerably or it will be predictable, the secondary corporate bonds market will have a stable amount of investors. It is clear that the secondary bonds market will not leave out of account the dynamics of inflation index in 2007. Profitability of new issues of bonds will be more or less inflation-oriented. The most negative factor in this situation will be weak predictability of the inflation dynamics.

More and more Ukrainian cities and oblasts declare issue of bonds. Are they marketable?

In 2006 issue of new municipal bonds continued. Additional bonds were issued by known issuers, such as Donetsk City Council. New issuers entered the market as well - Ivano-Frankivsk and Vinnytsya City Council. Not only oblast centres began to issue municipal bonds. Thus, for example, the bonds were issued by the city of Komsomolsk (Poltava Oblast). The total value of the municipal bonds issued for 9 months of 2006 increased by UAH 1 billon compared to the same period in 2005. The results of the trades in municipal bonds on the PFTS in 2006 in general reflect positive liquidity of these bonds. At the same time, it can be clearly noticed that liquidity of municipal bonds is variable. Thus, the city of Kharkiv municipal bonds are most popular and marketable, but the municipal bonds issued by the cities of Ivano-Frankivsk and Tscherkasy have a very low liquidity. This is reasoned, as secondary municipal bonds market is directed to the bonds of big cities, which have sustainable budgets and their investment image is reliable.

In 2007 the existing tendency of municipal bonds issue by non-oblast centres is expected to continue. There are enough of big industrial cities in Ukraine, which may issue attractive bonds for a wide range of investors. It may happen that appearance of new municipal bonds issuers on the market will encourage general growth dynamics of the secondary market of these bonds.

Ukrainian stock market is often blamed for limited directional selectivity of the issuers and "closed" companies. Do you share this opinion?

Share issues in 2006 and in previous years constituted the most part of securities issues. According to the results of 9 months of 2006, the shares were registered to the amount over UAH 34 billion. The share issue volume may be characterized as big, but unfortunately most of them are unmarketable. In spite of the fact that a considerable part of our joint-stock companies operate openly, in fact shares of only few issuers are marketable.

The banking segment is most attractive for investors. What future does it have?

The results of the stock trade on the PFTS in 2006 clearly show the increased interest to shares of commercial banks. Successful sale of Ukrainian banks to foreign investors made these shares attractive to a wide range of investors, including foreign portfolio investors. Pre-sale preparation of commercial banks ensured a considerable improvement of the protection system for corporate interests of all shareholders of the bank and in this way brought it nearer to European standards. Besides, unlike the industrial companies, information about the bank’s activities is more available and open. And, what is important, the commercial banks themselves inform promptly about the results of their current work. All this makes shares of commercial banks a transparent investment object.

In the previous year most popular shares on the PFTS were the shares of JCB "Raiffeisen Bank Aval" and JSCB "Ukrsotsbank". In fact, at the end of the year these shares have contributed to positive growth dynamics of the PFTS index. The second echelon of shares of commercial banks is significantly less in trade volumes than the shares of the first two banks, but they have a high potential for the future. It is expected that in the current year demand on the shares of these issuers will rapidly increase. It may happen that several new banks, which have similar assets, will join these issuers. Maybe investors will show interest in shares of commercial banks of the so-called "third echelon", to which belong the shares of OJSC «Rodovid Bank», "Megabank" PLC, JSC "Ukrinbank". These issuers have fewer assets than their bigger colleagues; therefore the market value of these shares is lower. In the longer term, shares of the commercial banks may and must become one of the most attractive spheres of speculations with shares.

What are to your mind the main tasks of native stock market for the next year?

Lack of current public information about the activities of the issuers, misuse of share registrars, weak protection of minority shareholders’ rights and a number of other problems were and still remain burning for the Ukrainian stock market. All this considerably hampers its development and makes it not a very attractive one for foreign investors. Still, it should be mentioned that the situation on the market of commercial banks’ shares creates a good basis for the future.

In 2007 functioning of stock market will to a great extent depend on general economic situation in the country. Inflation, fall of Hryvnya, consolidation of fiscal policy will worsen general perspectives of the securities market. At the same time, it may be expected that in the event of positive dynamics of gross domestic product, all these negative factors might be considerably lowered.

A positive factor would be appearance on our stock market of new financial instruments, such as mortgage and convertible bonds, as well as certificates of real estate transactions funds and mortgage certificates. This would widen the scope of financial instruments and provide possibility for a larger quantity of investors to participate in operations on the stock market.

Alesya Chemeris 

16.01.2007