Problems of formation of investment portfolio in the Russian market
Быкова В. В., Кондратьева С. А. Problems of formation of investment portfolio in the Russian market // Молодой ученый. 2016. №24. С. 159-160.
There is no doubt that the Russian stock market is a well-developed and successful platform for investing monetary funds in securities. For a long time, this market is considered to be a constant source of income for a great number of players not only from Russia but also from other countries. Many securities of companies in Russia provide their owners with huge opportunities to perform various manipulations in order to gain an additional profit.
Today, investments in securities are one of the main methods of capital preservation, protection against inflation, and a source of significant enhancement of own savings.
Topicality of this article is connected with the importance of developing and improving strategies of portfolio investment in the stock market that is associated with a constant need to find new original ways of investing money in securities.
The investment portfolio is a set of financial assets, used for carrying out investment activities in accordance with the developed investment strategy and serving as an integral object of management. Besides, with the help of portfolio investment, it is possible to plan, measure, and monitor effects of investment activities in different sectors of the stock market.
In accordance with the chosen investment policy and specific investment activities of the enterprise, different objectives of investment portfolio could be determined:
‒ maximization of capital growth;
‒ maximization of revenue growth;
‒ minimization of investment risks;
‒ guarantee of the liquidity of the investment portfolio.
So, the stock market plays an increasingly important role in the process of distribution of financial resources. The current economic climate in Russia provides a great variety of possibilities for increasing a volume of investments into securities of Russian companies. The volume and results of investment activity determine the rate of development and economic growth of the country.
The best investment may be an establishment of portfolios of securities, as the set of securities, to make such investment characteristics which are unachievable from the position of separately taken securities.
However, the difficulty is that the Russian market continues to be characterized by a set of negative features that prevent the application of the principles of portfolio investment. And this fact, to a certain extent, is holding back investors' interest. Thus, the problem of the article is to analyze the challenges that the Russian stock market possesses and suggest the ways to tackle them.
“Despite the global geopolitical instability that negatively affects the world financial markets, the interest in stock markets is not quenched. Companies seek for various opportunities to attract capital. Besides, many of these companies aim at developing markets in the future, because global economic growth and the future of the world financial system heavily depends on the conditions of such markets” .
In general, conditions of the Russian stock market are characterized by instability, a sharp change of stock quotes, high risk, including political threats, and a lack of quality securities. All of these determine a moderate variety of securities’ portfolios compared to the Western countries. As a proof, government securities were the most preferable objects of portfolio investment for a long period of time in Russia, but what is more, T-bills even did not comply with the characteristics of the conservative portfolio.
The key problems of the Russian stock market development are characterized below.
First of all, the impossibility of conducting a normal statistical series for most financial instruments should be highlighted. This is directly connected with the lack of historical statistical database, which leads to the impossibility of use the classical Western techniques in modern Russian conditions.
What is more, a large set of problems is associated with the process of mathematical modeling and management of securities portfolios. The portfolio of financial assets is a complex financial entity with its own theoretical basis. Thus, during the process of predicting, several problems arise. They are associated with modeling and application of mathematical tools. At the moment, an adequate mathematical technique for many emerging market situations is even not yet developed. This is connected with a little experience of development of such relations in Russia, and with the objective mathematical complexity of the models.
The next point is that the dimensions of the most important segments of the Russian market of securities are several times lower than that of developed markets. Thus, the relative size of the corporate bond market (relative to GDP), is 20 times less than the world’s average. The principle of assets’ diversification based on different industries is restricted due to the small number of traded securities of acceptable quality and their distribution on Russian market. Thus, shares which are quoted on the Russian Trading System, present only six sectors of the economy, with about 80 % of all the shares accounted for by oil and gas industry. In this regard, the principle of diversification, the revision of the composition of the portfolio at least once every three to five years, common in developed countries is difficult to be applied in Russia. Analyzing further, market for corporate securities is characterized by high spreads in the purchase price and the sale of shares, even on the most traded securities. As the result, expected income from the growth of the market value of shares may be offset by a high spread while realizing them on the market.
While operating on the Russian stock market, the investor has a rather limited set of assets to reach optimization in terms of risk and return. This limitation, in turn, negatively affects the liquidity ratio. In this case, the existing number of securities is simply not enough, and simultaneous investing in the assets by most of the financial institutions changes both risk indicators, and the indicators of profitability and liquidity. The approach to include securities with a large free-float index both in quantitative and monetary terms in the portfolio (for example, Sberbank, Gazprom, Lukoil and others.) adversely affects the performance variance and standard deviation.
Russian market demonstrates a high level of non-market investment risk. The rights and legitimate interests of investors are not fully protected. Long-term investment resources, which are very limited, are located on the financial market inefficiently, which, in turn, is one of the limiting factors of institutional investment development. So, Russian law does not allow the regulator to prevent the use of insider information and manipulation in the securities market effectively. The law does not regulate the issues related to the conduct of transactions with derivatives that does not allow investors to hedge market risks associated with conducting transactions. Consequently, the incompetence of the national financial intermediaries and extremely low involvement of Russians in operations is common for the stock market. The main reasons, among others, are low public confidence for the Russian securities market and lack of sustainable middle class in the country. Thus, the point to be considered is that restrictions in the legislation are forcing the majority of investors to keep funds on deposit bank accounts, rather than to invest spare funds in the stock market for economic development and increase of savings.
Some other factors representing short and medium-term risks include corruption of the state entities; the administrative burden on business; enormous social polarization.
To finalize, the relief to the stock market will come with adequate set of economic, administrative and legal measures. The key concern is a radical increase in the inflow of funds into the stock market from the Russian investors. Hence there is a need for rational use of national savings, the formation of effective capital raising and redistribution mechanism in the Russian economy, stimulating investment activity, reinforcing the country's position on the global capital market. Among others, it is reasonable to introduce tax incentives for investments in stocks of high-tech technological companies.
Summarizing all of the above, it can be concluded that the Russian securities market is characterized by weak formation in a macroeconomic sense. Investment activity is weak; the confidence of investors is low. Well — organized and structured securities market is an attribute of a developed prosperous market economy. Prospects for the Russian financial market will critically depend on whether Russia will be able to take advantage of a new wave of global uncertainty. One way to improve the situation on the Russian stock market is to strengthen the role of the state, namely through the reduction of the financial risks, compliance with laws and regulations on the financial markets as well as the creation of the legal framework with the adjustment to existing regulations on investment activities.
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