Why is it worth investing in Baltic Stock Exchange?
Until March 2020, my investing experience was concentrated in index instruments (ETFs) or in rare experiments in foreign shares. During the pandemic, I decided to pay more attention to what is happening in the Baltic Stock Exchange. Similarly to other investors I know, I was buried in prejudice that our stock exchange is illiquid and that it does not have many well-managed enterprises. However, that is not the case. Therefore, how and why invest in the Baltic Stock Exchange securities?
The choice of stockbroker
Regarding the preparation for investing, the first step is to open an investment account. An investment account is more convenient than a standard security account due to tax policies. In other words, taxes for the investment profit have to be paid only when a larger sum is paid out of the account than is paid in. As a result, it is possible to “postpone” the tax payments until you wish to take the cash out for consumption. Additionally, an investment account allows reducing the personal income tax for the amount of losses caused by unsuccessful investments.
When choosing the right stock broker to use for the Baltic stock trade, in my opinion, there is only one option. Swedbank is the only bank in Latvia that offers trading in the Baltic Stock Exchange without an additional commission fee. For sums below EUR 30,000, there is also no portfolio management fee to be paid. In addition, the Swedbank investment account can be opened and managed also through Internetbank. Banks’ shares trading interface is quite simple (in comparison to what foreign stockbrokers offer), but sufficient. Swedbank analysts also provide their own opinion on numerous shares, that way it is possible to expand one’s information field.
Invest in what you understand
Regardless of my earlier career in venture capital (or thanks to it!), I am a conservative investor and I follow the philosophy of value investors. This methodology is based on an assumption that the financial markets are not rational but mostly emotional; therefore, good and bad news’ influence is regularly overrated. As a result, shares on the stock exchange market can often be sold both significantly below and above their actual value. Taking into account the financials of the company and a more detailed analysis of the industry, value investors also try to find these undervalued companies. Similarly, I do not support speculative short-term investing. In my opinion, one has to purchase shares of those companies that you are willing to hold for at least 10 years. A successful venture capitalist is one who can successfully evaluate and forecast upcoming trends. It is similar to investments in shares – one must think in longer horizons and visualize if the particular industry and company are able to successfully grow. Therefore, my first investment criterion – invest in those industries or companies that you understand. For example, I am struggling to understand the product manufactured by SAF Tehnika, because I am not that competent in technologies. Therefore, SAF Tehnika (regardless of their great new Aranet product which I’m also using) is not a company, whose shares I would purchase. Meanwhile other investors, possibly, are well-oriented in the SAF Tehnika field and its shares would be perfectly suitable for them.
I recommend that everyone begins investment research by analyzing the financials. There are relatively few quoted shares in the Baltic states; therefore, it is quite easy to analyze and formulate an opinion about them. For instance, I export a list of all quoted shares from the NASDAQ Baltic Stock Exchange webpage and paste the information to a Google Sheets document. There with Google Finance functions, I can create a suitable tool to follow both the price changes and deal amounts. Firstly, I took out all of the shares whose average daily buy/sell deal amount is below EUR 1,000. If the daily deal number is low, it is difficult to both purchase and sell the shares for the desired price. Shares with low liquidity have a large bid/ask spread.
Then I start observing and analyzing these companies which at the first glance seem promising or easy for me to understand. Taking into account my own working area, I usually analyze bank shares, for example, LHV Group, Coop Pank, Siauliu Bankas. I begin each analysis by reading the latest annual report. Yes, I know that it is not the most interesting reading material, but it provides valuable information. When reading the annual report, I recommend paying attention to the management’s comments about the recent year and forecasts, and turnover and profit changes in the last five years, balance sheet and profit and loss statement positions that have significantly changed. In a nutshell – the most important information can be found in the notes of the annual report. Why is that important? Because, when looking at the company and its financials as a whole, one can try to estimate what would be an appropriate price to purchase the company. From this value, I calculate the value of, in my opinion, the appropriate share price. If my calculated price is larger than the one on the stock exchange, it is worth considering investing in it.
NASDAQ Baltic stock exchange provides the companies’ financials on its website. It comprises both annual reports and inter-period results. Analysts’ reviews of the companies are also valuable to take into account. Enlight Research, LHV Group, and Swedbank publish similar reviews on NASDAQ Baltic webpage as well. I personally prefer the analysis conducted by LHV Group – I tend to agree with their conclusions and their analysis is useful to expand your own knowledge of the particular company.
Bond investments pay off only for large sums
In addition to shares, NASDAQ Baltic offers investing in funds and bonds. Funds contain a group of enterprises or real estate, that is managed by a professional fund manager. A fund I personally like is Baltic Horizon Fund – it is a real estate fund with mostly premium class offices and shopping malls in the Baltic states. This fund has a significant operational history, relatively low commission fees, and great liquidity in the stock market.
On the other hand, bonds (corporate debt securities) enable the investor to receive an expected return on the investment – bonds provide regular interest payments (coupons) to their owners. The annual interest rate for Baltic companies’ bonds fluctuates between 2% (Ignitis Grupe in Lithuania) to 14% (DelfinGroup in Latvia) with numerous issuers who offer returns in-between. Bond analysis requires a completely different approach than share analysis. When purchasing bonds, the investor must evaluate the main risks while, when purchasing shares – opportunities. Moreover, it is quite complicated to purchase bonds – I am not aware of any internet bank that allows to do that. Therefore, to purchase a bond, one must call the broker and tell the purchasing instructions. Consequently, the commission fees of bond purchases are quite high. It means that it is more profitable to trade bonds in large quantities and hold them until the term ends. To create a well-diversified investment portfolio, in my opinion, one must spend at least EUR 100,000 on bonds. However, it is difficult to achieve diversity, because most bonds available on the stock exchange are of low liquidity. Therefore, although investing in bonds, in my opinion, is an attractive instrument with many interesting investment options, they are more suitable for affluent investors who can invest relatively large amounts. And even in such situations, I would advise applying in the initial bond issues, not purchasing the securities from the stock exchange. From the bonds available on the Baltic stock exchange, I personally find attractive, for example, Auga Group and DelfinGroup bonds – they have a great risk-to-return ratio. Soon the highly demanded Elko Grupa bonds will also be available for purchase on the Baltic Stock Exchange.
Companies whom I follow
Up until now, I have analyzed around 30 companies quoted on the Baltic Stock Exchange by the methodology described earlier. One conclusion is that Estonian companies are valued higher than similar Latvian or Lithuanian companies. That might be related to the fact that Estonia has more active private investors. My hypothesis is that when the Baltic financial market develops even more and investors start paying more attention to the possibility to invest in local shares, the differences between the countries will gradually disappear. I personally have been following and have invested in Siauliu Bankas, Olainfarm, Auga Group and HansaMatrix. For every investment that I make I create a short justification “story” in which I explain why I made this investment decision and under what circumstances I would sell these shares. Later it is interesting to follow the developments and check if my initial prognosis has come true.
In conclusion, I would like to encourage the existing and potential investors to pay attention to investments in the Baltic Stock Exchange. To make a successful investment, both perspective companies and attractive valuations can be found there. Besides, remember that you are advantaged by investing in companies that operate in the country you live in. You can assess the company’s position in the market, product demand, management’s reputation, and other factors better than foreign investors could. I believe that soon we will see numerous new companies that will decide to publish their shares on the stock exchange. If you start investing right away, you will gain experience and knowledge which will make you superior to those investors who will start investing in the Baltic Stock Exchange later. And currently, there are not so many alternatives where you can make your money earn itself – the deposit era is over and other financial instruments do not even come close to those profit options that investments in securities can offer.