A Good Offer for INA Will Create a Positive Psychological Moment on the Stock Exchange

Although many companies had plans for either an IPO or additional stock offerings, all have been postponed for the future. Investors today have no money, and it is questionable whether any IPO would succeed under current conditions. If it did succeed, it would be at low prices.

Interviewed by: Gordana Gelenčer
[email protected]
Photo: Dražen Lapić

At the peak of last year’s stock market euphoria, few warned that such enthusiasm for ‘easy’ profits could backfire on investors, especially small, inexperienced beginners. That is why, even in the financial crisis, which most foreign analysts still do not see the bottom of, Daniel Nevidal, director of Intercapital, the second-largest shareholder of the Zagreb Stock Exchange, sees good news. Investors have had to feel firsthand that prices will not always go up, says Nevidal, who is regarded among experts as one of the better connoisseurs of global currency movements. Intercapital is, however, more active in the bond market than in the stock market, for which it was awarded the prestigious Euromoney award for excellence last year.

• In the flood of bad financial news that we have been inundated with since the end of last year, there is one unusual piece – the dollar has started to recover. What is happening in the global foreign exchange market?
– Since the collapse of the Twin Towers in 2001, a cycle of cheap money expansion has been ongoing. To support economic growth and exports, the FED sharply cut interest rates. The dollar has weakened for years due to deficits in the state budget and the current account of the balance of payments. In the last year, it has weakened primarily due to the FED’s aggressive interest rate cuts to mitigate the effects of the subprime mortgage crisis, alongside a slight growth in the economies of the Eurozone, the UK, and Japan. However, this relationship began to change in recent weeks when it was announced that both the Eurozone and Japan experienced negative growth in the second quarter. A global recession will force central banks around the world to lower interest rates. This will reduce the difference compared to American rates. In the foreign exchange markets, this has already led to increased dollar purchases.

• There are also renewed tense relations with Russia, fluctuating oil prices, and the upcoming presidential elections…
– Tense relations with Russia and new geopolitical uncertainties are not a good thing. Relations with Russia, which are cooling these days, contribute to a new rise in oil prices. That price had begun to fall, which could have been a positive consequence of the crisis, but now, due to geopolitical problems, it is starting to rise again. The current global problem is high inflation and declining economic growth, thus classic stagflation, which was also a major problem for the world economy in the 1970s.

• What relationship between the dollar and the euro can we expect?
– If the catastrophic expectations of some analysts prove to be accurate or partially accurate, the dollar could continue to rise. The exact relationship is impossible to predict, but if it falls below 1.40 or 1.38, it could really strengthen rapidly. If a real estate market crash occurs in the US, we could welcome the end of the year at levels above 1.60. All indicators of the real estate market show that the situation there has worsened, more and more people are returning homes, and there are increasing numbers of non-performing loans. In that case, financial markets will turn back to American problems, and the dollar will lose value again.

• Is there perhaps a trend of capital fleeing from the stock market to the foreign exchange market?
– No, capital is fleeing into ‘cash’, into the least risky investments like treasury bills. This will certainly be needed in the capital markets for some time.

• How will inflation, which is higher in America than in Europe, affect the dollar?
– It is already increasing in Europe as well, and according to the law of connected vessels, the more the euro weakens, the greater the import inflation, which then determines interest rates and the relationship between the dollar and the euro. This could lead to a short-term decline in the dollar, but with a change in interest rates, this will reverse.

• We are less concerned about the dollar and more about the euro and the fact that it is sliding towards seven kuna. This is good for inflation, but not good for exports and the balance of payments. What are the movement estimates?
– The strengthening of the kuna is a consequence of high inflation. The HNB can only tighten monetary policy and raise the price of the kuna. There is much discussion these days about at what level the HNB will intervene, whether it will be at 7.10 or at seven kuna. That is more or less the only thing it can do. The state should be more actively involved, reduce consumption, regulate excise duties, and thus slightly reduce pressure. This is not happening now, and the HNB is fighting against inflation as best it can. The danger is wage indexation, a race of rising prices and rising wages.

• Many have burdened their salaries with loans for purchasing shares from the public offering, but the capital market is sinking deeper and deeper. What are the forecasts?
– The capital market is caught in a spiral of money withdrawal, more expensive loans, and reduced indebtedness. As long as the value of homes in America and around the world continues to fall, the market will not recover significantly. Historically, stocks in the West are now cheap compared to average indicators over the last 20 or 30 years. In Croatia, prices are approaching Western levels due to this decline. However, that means nothing when there is no money to invest in them.

• Is it better in such a situation that the Zagreb Stock Exchange is small and shallow, so the impacts are smaller than on larger exchanges?
– No. The worst thing that can happen to a market is illiquidity. It is better for impulses from the world to be transmitted immediately, but for there to be liquidity, so that every investor knows they can withdraw from the market, than to be in a situation that prevails in all markets in the region, not just in Zagreb, as it is still the most illiquid in the region, where you are buried in investments and cannot get out of them.

• The Zagreb Stock Exchange has revived with public offerings. But now, it is clearly not the time for that, although there was an announcement.
– Investors currently have no money, and it is questionable whether any IPO would succeed under current conditions. If it did succeed, it would be at low prices, which is not in the seller’s interest. Although there were plans in many companies for either an IPO or additional stock offerings, all have been postponed for the future. This could change if the offer for INA is good, as it will not only release a large part of the money of investors who currently hold INA, but it will also create a positive psychological moment.

• And what psychological moment could the legalization of securitization provoke? The law is ready, but it is probably waiting in the drawer for better times.
– It should not take too long to wait. Securitization as a concept currently has a negative connotation due to the mortgage crisis and its consequences, but it is an extremely useful financial operation that releases liquidity, which helps the entire financial system to grow and develop.

• You said that in these times of global crisis, it would be better if the Zagreb Stock Exchange were larger and more liquid. Consolidations and mergers are widely mentioned.
– The future of the market lies in mergers, cooperation, and joint platforms. Small national markets are not interesting to any serious investor, as has been shown in the last year when trading volumes have drastically fallen on all exchanges. The market becomes more competitive through consolidation, and all arguments favor greater cooperation. The Vienna Stock Exchange has bought the Ljubljana Stock Exchange, but it will take some time to see the results. Zagreb, as the most liquid exchange in the environment, and Croatian investors as the most active have the opportunity to be the consolidator of the region and the leader in the integration process.

• If the Vienna Stock Exchange wanted to buy your stake in the Zagreb Stock Exchange, would you agree to sell?
– We will think about such offers when they arrive. In the meantime, we still see a great opportunity to increase the value of the Zagreb Stock Exchange by introducing new products and leading the consolidation of the entire region.

• How much can the new Capital Market Act help with this?
– There are quite a few new rules set by EU directives. It is good to do this as soon as possible, as it gives everyone more time to adapt to the new business rules before the doors to the EU are fully opened. Although the regulation will now be the same as in the EU, the industry is protected until Croatia enters the EU in terms of opening up to foreign large investment banks, brokerage houses… Once those doors open, competition will be fierce. That is why it is good to introduce these novelties now, even though some of them are painful for the entire industry, especially for private houses that are not bank-owned and whose capital is limited.

• Have you calculated how much increasing the share capital will cost, maintaining capital adequacy at the banking level?
– We do not have an exact calculation, but these are costs measured in hundreds of thousands of euros and more. In any case, it is very expensive, so it is logical to assume that this will lead to the merging of some smaller houses and consolidation.

• How many brokerage houses could remain after the doors to Europe open?
– There are currently about 40, and estimates for a market of our size suggest that this number could be halved. This happened in countries that entered the EU in the first and second waves. I do not believe there will be liquidation; it will mostly be consolidation.

• An additional cost is the Fund for the Protection of Small Investors.
– Correct, but securing the deposits of small investors could return multiple times to the industry through greater trust, more investors, and more trading. The indirect effects could far exceed the cost.

• As competition increases, can we expect lower fees for clients? Will this be one of the ways to compete for clients?
– Certainly, that is a trend in every industry; greater competition leads to improved conditions for clients.

• You warned last year about too many speculators in the capital market, mostly small players without experience. Have they learned their lesson, can we expect that future investments will be made with cooler heads?
– I believe they have, but I do not think it is bad that many people appeared in the market. I warned then about a kind of moral hazard. In that great euphoria, which peaked last year, a mass of people began to think that the market would always go up, that they no longer had to do anything in life, but just invest in the stock market and earn. That is why such crises, which occur periodically in all markets around the world, are good because they lead to sobering and cooling heads. The base of investors and trends become healthier. When the market recovers, I think both small investors and professionals will behave better.

• How much are the brokerage houses themselves to blame for this? Did brokers warn investors too little that the capital market is not always a golden goose?
– The entire system should have reacted better. The euphoria was such that there should have been more media appearances; brokerage houses should have worked more with their clients. However, we should not view all this catastrophically; we did not experience a stock market crash, but rather a correction of 30 percent. That is not small, but if investments are approached long-term, which the industry should constantly suggest to clients, that correction will not look so serious on a long-term chart.