High inflation has recently brought the topic of preserving the value of money to the forefront, and the state issuance of government bonds and the offer of treasury bills to citizens have further fueled interest in investing. This was the reason for the interview with Danijel Delač, a member of the Management Board of InterCapital Securities, in which he explained the situation in the Croatian and regional capital markets, what we can learn from the Romanians, why we do not have more IPOs, what he thinks about investing in real estate, and what moves could help revive the Croatian capital market.
In the last twenty years, there has been considerable consolidation in the Croatian capital market. Will this trend continue?
– When I started working in 2007, there were about forty brokerage houses in Croatia, and today there are fewer than fifteen. And that is too many considering the level of illiquidity of the Zagreb Stock Exchange and the neglect, or underdevelopment, of the local capital market. Therefore, the consolidation is not surprising. It is happening among brokerage houses and investment fund management companies and is not just a local phenomenon. We see these trends in developed markets as well. Increasing regulatory, IT, and organizational demands are prompting market participants to seek economies of scale, either through organic or inorganic growth. Once, you could have a brokerage house with literally a few employees, and today it is almost unimaginable to operate seriously in this business without at least twenty or twenty-five people. Besides the consolidation compared to the golden days of the ZSE more than fifteen years ago, there is a significant difference in that brokers used to primarily deal with the Zagreb Stock Exchange. For comparison, for us at InterCapital, the Zagreb Stock Exchange is now almost minor. We are no longer just a Croatian brokerage house – we have stepped onto foreign exchanges, and our clients are no longer just from Croatia. For years now, the trend has been shifting towards American and somewhat European exchanges and stocks, with less and less focus on the local market. Therefore, it is wrong to compare the situation then and now, or to compare the turnover on the Zagreb Stock Exchange and conclude that today significantly fewer people are trading. No, people are just trading elsewhere. Overall, today Croats are certainly trading much more than they were fifteen years ago, but in other places and with different stocks.
How many Croats, according to your estimates, actively invest, and how many own shares of some companies but do not actively trade them?
– There are probably fewer than ten thousand truly active investors; those who own shares but do not trade them are significantly more. When HT was listed, it had over three hundred thousand shareholders, and today there are at least half left, so probably between two hundred and three hundred thousand Croats own some shares. Those who actively trade are probably only a few percent of that total number.
From which sectors do those who invest the most come?
– It is not surprising that people from IT lead the way. Trading, platforms, that is their natural environment. IT professionals are, logically, the most receptive to risk and novelties. They are well-paid and are generally young. From my experience, a solid number of lawyers are also active in the capital market. If we talk about other sectors, there are not many medical professionals, nor journalists… And, of course, a large number of investors are finance professionals themselves.
What is the profile of the average Croatian investor?
– Most often, younger people and those in middle age invest. They trade well-known global tech stocks like those of Apple, Microsoft, Amazon… Given that they are willing to trade stocks abroad, they have a slightly higher risk appetite. Thus, they do not want a return of two or three percent per year like, for example, on government bonds or treasury bills. That is why about sixty thousand people subscribe to them, while only a few thousand trade stocks. In Croatia, there is still a perception that everything the state does offers security, while stocks are seen as a risky asset class. It is nice to look to the West and follow what is happening there, but they have had capitalism for two hundred years, and we have had it for twenty-five. Therefore, there is a knowledge gap that cannot be bridged overnight. It is good that younger generations are learning, informing themselves, and are interested, so we hope that this gap will be filled over time.
Have government bonds sparked interest in investments, or is this a current trend?
– It depends on what the state plans to do with it next. There is a danger here, and I would not like to see it happen, that it monopolizes the market and pushes the financial sector out by channeling everything towards itself. The state must have a clear idea of what it is doing with that money, i.e., how much it needs. A plan is needed for that, not a spontaneous approach to the market to collect as much capital as possible. So far, there are no signals that this will happen here, but, for example, in Hungary, we have seen exactly such a case. There, the state has crafted rules that favor itself, attracting citizens’ money at the expense of the financial sector.
You often mention Romania as an example in your posts. Why?
– Historically, all Eastern European markets have much in common, from communism to the transition of the 1990s. Larger and more serious economies from that group, such as Poland or Hungary, have made huge strides in the capital market. However, we can draw even better parallels and comparisons with Romania, as it has done many good things that we should look up to. For example, Fondul Proprietatea. Romania established a fund that included minority stakes in various state-owned enterprises. This fund was then listed on the stock exchange and is managed by an American asset manager. This move has greatly stimulated its capital market and interest in it, not only from local but also from foreign investors. In the end, the companies in the fund have been performing better over the years. Thus, a 75 percent state stake in a company is now worth more than the previous 100 percent. And that is the point. The point of the capital market is to create the premise that healthy companies on the stock exchange can raise new capital for business expansion and that, in the end, shareholders earn and become wealthy. This is the way to reduce the wealth gap compared to the West. Therefore, we must start behaving and investing like people in the West: in stocks, bonds… All of this has been neglected here, and not enough is being invested. In the end, simply put – we are lagging behind.
Which Croatian state companies could copy this Romanian model? Which of them would investors like to see in such a fund?
– Absolutely HEP, then HAC, potentially any municipal company. The state still has a stake in Podravka and similar blue-chip companies, in many tourist companies. Part of this is currently managed by CERP and elsewhere; not very efficiently, in my opinion. So, the state has a huge portfolio. There is no need to privatize by force, but everyone should keep in mind that professionally managed companies perform better than those that are managed spontaneously.
As part of the pension reform, the establishment of an alternative financial fund guaranteed by the state is announced. This seems quite different from the Romanian model, at least judging by what has been made public so far?
– Yes, according to the available data in the media, and there is not much of it, it seems that this is a completely different concept. Since much is unclear, I would not venture into detailed assessments of the model. I can only say that it is not usual.
What is the condition for the growth of the stock market and trading here? If there were more companies on the stock exchange, would there be more investors? What is the chicken and what is the egg in this story?
– The condition is more quality companies. According to the law of force, there used to be between 400 and 500 companies on the stock exchange, but many of them did not want to be there; they did not make an effort regarding shareholders and actively worked against being listed on the stock exchange. It is better to have twenty or fifty robust listed companies than 300 or 500 non-investable ones.
Why are there not more companies here opting for an IPO?
– The fact is that there are many companies in Croatia whose owners started businesses in the 1990s and are now sixty or seventy years old. Such companies, if they do not have succession resolved, have two options: go public or sell to a strategic partner. Since the latter often brings a better valuation, that is the most common outcome. Going public makes sense only if the funds from the IPO are used for further business development. If the owner is seventy years old and has no ambition for further expansion, it is logical that they will not opt for an IPO. On the other hand, there are many companies that may want to step out, but for various reasons shy away from the stock exchange. Is it a matter of distrust, ignorance, or do they perhaps prefer to rely on bank loans? There are hundreds of reasons for this.
Speaking of ignorance and distrust in the stock exchange, Croats are evidently still mostly interested in investing in real estate…
– The value of real estate in Croatia has been rising for years, but does anyone ask until when? And until when will there be no taxes? The population is decreasing. We have many immigrants, but they do not stay long and are mostly in Zagreb. Essentially, there are not many reasons for real estate prices to rise in the long term, except for those on the coast. Croats invest heavily in real estate out of ignorance or because such investment is familiar to them. The rental yield on real estate in Zagreb is generally between three and four percent. And that is not a good return. Croats have seen a constant rise in prices due to real estate, but that is a risky game that cannot last forever. If today the average price per square meter in Zagreb is three or four thousand euros, we cannot just conclude that one day it will be seven or eight thousand. The prices of serious real estate in Tuscany are now lower than in Istria. In Zagreb, there are fifty thousand empty apartments. Therefore, it is logical to raise the question of their taxation, at least for those empty properties, in order to somehow penalize this form of speculative behavior.
The entire interview can be read in the digital or printed edition of the business weekly Lider.
