Creator and driving force: how retail investor restored market balance

For the first time in Russian history companies got an opportunity to issue shares at domestic exchanges for the account of retail investors only. This shift in the balance of forces creates balance and enables Russian issuers to feel more secure when building their books and negotiating with foreign investors, says Vladimir Potapov, Senior Vice-President of VTB

The Russian stock market is undergoing a major transformation: the share of investments in the savings portfolio of Russians has grown from 13% to 20% over the latest two years. The influx of retail investors, which started back in 2019, has massively accelerated during the pandemic. The market crash in the spring of 2020 and the subsequent recovery helped millions of new market investors gain positive experience. This rare opportunity presented itself when it was needed, having multiplied the effect of word-of-mouth advertising. And this trend still has significant growth potential — the share of investments in the savings portfolio in European countries is at least 40%, and in America it is over 70%.

By mid-2021, the amount of retail investor money at broker accounts grew up to RUB 7,2 trillion. Monthly volume of share purchases by retail investors is increasing. According to the Moscow Exchange, in October it amounted to $1 billion, and the share of retail investors in equity trade volumes climbed above 40%.

The role of “ordinary” people has not only made itself obvious. In the latest months it has been driving stock index dynamics. According to the Bank of Russia, from April to September retail investors accounted for over 85% of net equity purchases in the market. This demand has not only covered equity sales by foreign investors, but also provided for the Moscow Exchange index hitting the new historic maximum value.

Direct conversion of private savings into investment is gaining momentum. This determines higher focus of investment banks and corporations to such investors as potential buyers of issued shares and bonds. Today every fourth new corporate bond is purchased by a retail investor. In 2017 retail investors accounted only for 2% in such instruments.

The situation is the same for equity issues (IPO, SPO). The demand from “natural” persons in some trades allows for their closure with no participation of foreign institutional investors, and this happens despite the fact that retail investors are usually very cautious about equity issues. According to VTB Capital Investments, IPOs currently attract no more than 1% of the aggregated investment portfolio of retail investors. And we believe that growth of this value by two-three times is absolutely achievable. This would be equivalent to an annual inflow of $4-10 billion into capital of promising Russian companies over the next three years. What would it take for this money to become a source of long-term capital?

A comprehensive program for primary capital market development in Russia is required. The Government and the Bank of Russia already have a similar experience: they have efficiently coordinated activities to launch and develop the individual investment account (IIA). A similar program is required to transform stock market assets into a long-term capital source.

For example, these could be tax preferences both for investors and issuers. It is important to note further improvement of corporate governance of public companies and expansion of institutional investor opportunities to take part in IPOs. The Russian financial market is going through qualitative changes, created and driven by retail investors today.

The views expressed in this publication are those of the author ravnovesie