By Rhod Mackenzie
Russian management companies will receive licenses to operate on the Asian stock markets - in India and China. Such licenses allow you to open accounts with local brokers, as well as with banks and depositories directly. Almost simultaneously, the first trading in Hong Kong ETFs started on the SPB Exchange. Obviously, all these are attempts to restore the interest of the mass investor in foreign assets. However, due to sanctions risks and the instability of emerging stock markets, this may remain a niche story.
Investments with an Asian flavor
At the end of June, Pervaya Management Company received a foreign portfolio investor license (Foreign Portfolio Investor, FPI) from the Securities and Exchange Board of India. The license allows direct management of client portfolios in the Indian stock market.
At the beginning of the year, another management company, Alfa Capital, received a similar license. The company acquired the status of a foreign portfolio investor. Alfa Capital stated that transactions in the Indian market will initially be available only to qualified investors as part of a managed strategy. The minimum entry threshold is rather big - 1 million rubles.
By the end of the year, a license to operate on the Indian stock market should be obtained by Finam, which back in March entered into a partnership with FinSight Ventures and Ashika Group, a venture capital investment company and a financial company, respectively, that invest in the Indian market and provide brokerage services there.
MC "First" and "Alfa-Capital", having become the owners of licenses, got access to the Indian stock exchanges - Bombay and National, and Finam is also striving for the same.
Recently, their indices have shown growth. Thus, over the past five years, the BSE SENSEX index, which tracks the performance of the 30 largest companies traded on the Bombay Stock Exchange, has more than doubled. And the NIFTY50 index, the main index of the National Stock Exchange of India, increased by 45%.
The shares of Indian companies are less known to the Russian investor than the hyped Tesla or Microsoft. Among the major Indian players is Tata Motors. This is an automaker that is known not only for funny miniature cars and minibuses sold in third world countries, but also for the fact that in 2008 the auto holding bought the British giant Jaguar Land Rover. Another well-known Indian company - Dr. Reddy's. This is a pharmaceutical holding producing a wide range of medicines, including generics.
Represented on the stock exchanges of India and a large financial holding ICICI Bank. As befits a modern bank, it is not only engaged in lending, but also provides insurance services, as well as private banking services.
Until recently, Adani Enterprises Limited, the empire of one of the richest people on the planet, Gautama Adani, was also among the most promising companies in the country. At the beginning of the year, she almost collapsed. The American company Hindenburg Research published a 100-page study about Adani Enterprises, and it was like a bombshell. The Adani conglomerate was accused of fraud with securities, theft of funds, and pressure on government agencies in India. As a result, in just three days, the capitalization of Adani Enterprises Limited fell by $68 billion.
Clients of Russian management companies will be able to invest money in the Indian market in rubles, although the transactions themselves will take place in rupees.
In order to fully enter the Indian market, it is first necessary to form a pool of funds in Russia, the press center of Pervaya Management Company explained to Expert. They will be sent to a special account in India - SNRR account. When buying or selling securities of the management company, you must submit an order to the broker. Information about it will be received by the Indian custodian, who carries out clearing operations on bank and depositary accounts. Thus, the money will be held in a bank account, while the papers will be held in an account with the Central Depository of India (NSDL).
Another Russian company that has gained access to the market of friendly countries is Ingosstrakh Investments Management Company. At the beginning of the year, she was given the status of a qualified foreign institutional investor (QFII) in China, and then a license from the PRC Securities Regulatory Commission, which allows her to trade in securities and futures.
The largest and oldest sites in China are the Shanghai and Shenzhen stock exchanges. The local stock market has traditionally focused on local investors. The number of foreigners there began to grow rapidly only in the 2010s. True, there are still few such investors: according to Goldman Sachs estimates at the end of 2021, only 4.5%.
For foreign investors, the Hong Kong Stock Exchange initially worked. The Russians have already begun to actively look at its issuers. So, in mid-2022, the first 12 Hong Kong issuers appeared on the SPB Exchange. And today there are already 115 of them. Among them is the financial holding China International Capital, which provides brokerage services, is engaged in asset management and investment banking. As well as the largest insurance company in Asia AIA Group Limited, China's second largest bank China Construction Bank and the oldest Chinese bank Bank of China.
Among other interesting companies is the famous Alibaba: an analogue of the popular AliExpress in Russia, but only for wholesale trade. As well as Tencent, a holding company that created the messenger of the same name, a smartphone, and various software.
Now all these papers are traded in Hong Kong dollars, but before the end of the year, the St. Petersburg Exchange wants to give access to Hong Kong securities with settlements in yuan.
On June 12, trading in shares of exchange-traded funds started on the St. Petersburg Exchange. These securities are settled in yuan and Hong Kong dollars and are stored in a friendly infrastructure.
True, there is no excitement around the Hong Kong securities in Russia yet.
One way or another, the aforementioned management companies are going to offer Russian investors trust management, investment funds and exchange-traded mutual funds for investing in shares of India and China.
Management companies explain that there are no obstacles to organizing trade in friendly countries now. Yes, the currency of India, the rupee, is limited convertible, but there are no restrictions on the withdrawal of funds to foreign investors outside the country (not in rupees, but in another currency). According to Igor Taran, head of Alfa Capital's fixed income directorate, in order to transfer money from there, one has to pay the entire current accumulated tax on operations with securities in the Indian market. After that, funds can be converted into rubles and sent to Russia.
There will be no problems with double conversion. A foreign investor license will give Russian management companies the opportunity to convert rubles into rupees directly, bypassing intermediate conversions into dollars.
However, the issue of sanctions risks remains open. All three management companies in a conversation with "Expert" assured that the entire exchange infrastructure, which they will use in China and India, is friendly. For example, in India, the main depository is CDSL, which controls almost 90% of the country's securities market. It will open the investor's personal account, which will be accessed by the local custodian.
But all this does not exclude the risk that India itself, while remaining neutral, will suddenly begin to restrict transactions or close the accounts of Russians. For example, some banks in the UAE, including the country's second bank, ENBD, have begun transferring Russians' assets to separate accounts. Payments on securities owned by Russians will be transferred there. And the Central Securities Depository of Kazakhstan recently began the forced segregation of brokerage accounts of Russians from the accounts of other clients of local management companies.
Another problem is possible high commissions. Representatives of management companies, however, deny that such trading may be too expensive. Thus, Artem Mayorov, director of the asset management department at Ingosstrakh-Investments Management Company, said that commissions for a deal on Chinese exchanges would be hundredths of a percent. The same costs would have been if the company entered the European or US markets during the pre-sanction period. The only difference is that in the Chinese market, a stamp duty of 0.1% is charged for the sale of shares. Such a tax exists in many Asian countries.
However, according to independent economist Andrei Barkhota, in fact, the commission on Asian exchanges can be noticeable. At the same time, against the background of small volumes of such services, these products will be less marginal for management companies in comparison with classic brokerage on the Russian stock market.
According to Barhota, management companies are more likely to enter Asian markets for marketing purposes. They are interested in retaining and increasing their customer base, and for this it is necessary to expand the product line.
For several years, Russian investors have had access to funds for Asian stocks - for example, the Tinkoff Index Pan Asia fund (Tinkoff Pan-Asia) or Alfa Capital Chinese Shares, the latter was the largest of these funds, its size reached 5.5 billion rubles. After the destruction of the bridges between NSD and Western depositories, all these funds were frozen. So now Russian professional participants have to build a new infrastructure for access to friendly markets. But whether investors who traded US tech giants and major European players a year ago will also be interested in Asian markets remains to be seen.
This article first appeared in Russian at expert.ru