Podobnik: Croats do not know and do not want to invest, they prefer to keep money in banks

Crobex, the index of the Zagreb Stock Exchange, is going through one of the most successful years in its history. Namely, it has achieved a growth of 24.1 percent from the beginning of the year until now, thus reaching the highest levels in the last 15 years. Interestingly, Crobex also stands out among leading European stock indices by yield, specifically, it is surpassed only by the Russian Hungarian BUX, Greek Athex, and Russian Moex, as reported by FIMA Securities.

The Croatian capital market is, as we already know, with relatively lower turnover and liquidity, even in regional terms. Last month, the exchange had a turnover of about 40 million euros, which is on par with Slovenia, Slovakia, and similar smaller countries. If we were to compare the current growth of Crobex with that fateful one from 2007, which resulted in a major crash due to the consequences of amateur investors eager for quick profits entering the capital market, much is still different.

Banks profited the most

– When profits are good, investors are silent, because if it gets out, the profit is shared with the whole world. Usually, when retirees start investing, it is a sign that a crash is near. Many lost money in 2007 because they overlooked that institutional investors, especially pension funds, dominate the Croatian capital market, but this is a consequence of being a small country with no competition among investors.

It is clear why this may remind someone of 2007: inflation is high, the economy is at its peak, and it is normal for citizens to want to protect themselves from the depreciation of savings through investment. Some money that is losing value is spent on real estate, while others on stocks, and increased demand raises stock prices – explained Boris Podobnik, a professor at ZŠEM.

However, there is one key difference compared to 2007, Podobnik believes. Croatia is now in the Eurozone, and its citizens can invest without currency risk. Of course, banks have realized this as well.

– Bank stocks have achieved double the performance of the rest of the market. The Croatian Postal Bank (HPB) recorded a growth of 74.4 percent, while shares of Zagrebačka Banka (ZABA) increased by 49.1 percent. At the same time, shareholders of Zagrebačka Banka have the right to receive a record dividend of 1.69 euros per share, which at the time of entitlement represented a dividend yield of as much as 13.9 percent.

The semi-annual financial results of banks confirmed the justification for purchasing their shares. For example, the return on equity for domestic banks has jumped to 16 percent this year, which further positively affects the growth of their profitability – wrote Milan Horvat, CEO of FIMA Plus on LinkedIn.

State companies in IPO

Younger generations are more inclined towards digital finance, Podobnik adds, which allows them to invest in major global exchanges through various applications, but he does not believe the effect will be the same as it was in 2007. Although the circumstances are very similar due to the current situation in Ukraine, inflation, the creation of new supply chains, and dedollarization.

– For the capital market to thrive, it is necessary for new companies to be listed on it. I fear that with globalization and the fact that our unicorns like Infobip are considering whether to list on the New York or London Stock Exchange, the train for deepening and further growth of the capital market in Croatia has long passed.

A new class of entrepreneurs has emerged in Croatia, for whom the idea of an ‘exit’ is probably not to organize an IPO on the stock exchange. What could slightly, albeit temporarily, revive the exchange is if it decides to go for an IPO of some state companies, especially monopolies. This is probably inevitable, as diversifying the ownership structure in public companies and improving corporate governance is one of the main requirements for Croatia’s entry into the OECD. Otherwise, anyone in production knows how many problems you have with inspections, and that is why Croats prefer to invest in apartments rather than companies – explained Podobnik.

‘Croats do not know and do not want to invest’

The relationship between stock prices and inflation is, he says, textbook. With rising inflation, real interest rates fall, which raises the present value of future dividends, and thus the price of stocks. On the other hand, higher inflation leads to even greater uncertainty, which can discourage investors from investing in stocks.

For this reason, the decisions of the central bank regarding further interest rate increases are closely monitored, Podobnik explains, as an increase in interest rates will necessarily lead to a decrease in stock prices, which will slow down the exchanges or nullify it. The USA is the best example that with money printing, inflation is not visible in the prices of bread and salami, but in stocks, as it was mostly distributed to banks and the financial sector.

– Banks have profited from rising interest rates, increasing interest rates for companies, without raising interest rates on citizens’ savings, thus increasing the spread between these two rates. They have also increased various fees justifying it with inflation. Why can they do this? Because Croats do not know and do not want to invest, but prefer to keep their money in bank accounts.

However, as there is a danger that deposits will legally leave Croatia, our banks are now waking up. If they had been more afraid that clients would withdraw their money, banks would have raised interest rates on savings much earlier. This has led us to a situation where governments in the EU threaten to impose an extraordinary tax on the extra profits of banks because they have not raised passive interest rates. Collecting such a one-time tax from banks is a cheap political point for politicians – concluded Podobnik.