According to the Knight Frank consulting company, prices are expected to rise...
Dmitry Shabin is our client and expert with many years of experience in the field of finance. In an interview with Dmitry, we discussed the state of the banking system, forecasts for the global economy and investment strategies during the crisis.
Dmitry Vladimirovich, how do you assess the current state of the banking system in Russia?
I would now compare the Russian banking system with a cart pulled by a swan, cancer and pike, as well as a number of other animals. In addition, all development goes on a spiral, and today’s round is now passing over the nineties of the last century, during a period of total unprofessionalism and extremely slow operations.
If we dwell a little more on the animals that are pulling the banking sector, then one of the main trends is the desire of banks to maximize savings on all processes using conveyor technology and transfer the maximum number of operations online when the user does everything on his own.
Big Brother knows more and more about us, so automated services make many decisions on their own, and this can not be stopped. Of course, it is impossible to drive absolutely all needs into a Procrustean bed, so the flexibility and timing when making decisions on non-standard situations are very affected.
Increasingly stricter requirements for banking supervision and indicators of banking activity brings additional difficulties. Basel I, Basel II, Basel III, new regulations – all this strongly regulate everyone sneezed even by a small bank clerk, complicate and increase the cost of the banking process. It is becoming increasingly difficult for small and medium-sized banks to maintain a growing apparatus of supervisors and accountants forming a “shaft of reporting”. In general, the state represented by the Central Bank of the Russian Federation encourages squeezing small and medium-sized banks. Managing of a dozen large banks, especially state-owned ones, is much more convenient and easier.
Russia has its own, special way of development, as you know, and the Russian banking system is not an exception. If in most European countries lending to banks is generally unprofitable, and banks make their main profit from commissions, in Russia loans are still the main source of income.
The upward trend in commissions is also present, but not too deep. At the same time, deposit rates significantly exceeded inflation until recently, suppressing most investments. But online technologies come here also, and many banking services, including settlement, credit and deposit, enterprises and citizens can get not only from regulated and inflexible banks, but also through the capabilities of B2B, B2C and even C2B. Of course, the long-announced direct lending by individuals to enterprises is still practically not developed, but the matter is only about creating a convenient aggregation platform.
Let`s touch another part of the financial sector. Analysts say that shadow banking can increase the risk of the global financial crisis. Despite the fact that shadow banking makes a significant contribution to financing the real economy, the lack of transparency increases the risk for the financial system as a whole. How much do you think regulation needs to be strengthened? And which supervisors are best suited for this?
In my opinion, the regulation of banking services should not be strengthened, but weakened. It is necessary to strengthen responsibility.
Banks are becoming less flexible, more clumsy and uncompetitive. They have to devote more and more energy and resources not to maintaining and developing a business, but to reporting. At the same time, what is forbidden to banks is fairly freely picked up by non-banking semi-criminal structures, which then easily evade responsibility.
And often the desire to protect banks and enterprises from small problems in the banking sector leads to the formation of much larger problems in non-banking.
As a person who is familiar with the formation of bank statements, I can argue that a competent financier can hide real problems in reporting for a long time.
Therefore, tightening regulation and tightening control alone will not lead to a tangible improvement of the situation.
In my opinion, the solution here could be to increase the responsibility of specific managers for making specific decisions. And only specialized structures with banking professionals working inside should make a decision on the degree of this responsibility.
Taking into account the magnitude of the impact on economic of OPEC transactions and coronavirus, what do you think is the most important in terms of consequences? Perhaps you highlight any other factors for yourself?
As a result of quarantine, a lot of people fell out of the process of generating GDP for a long time. That is, much less real products and services have been produced, and less will be produced for a sufficient long time. At least a year. Since many links and chains have already been destroyed, the restoration of which will take time.
It is also impossible quickly restore the “pre-war” level of population`s demand and the level of investment by companies. At the same time, a lot of countries began to solve current problems with the help of a gigantic stuffing of money into the economy. If the economy succeed to restart in 4-7 months, after that the “excess” money will take back immediately, then this money will not put much pressure to inflation. But this is unlikely to happen. An increase of money supply with a drop in GDP can significantly accelerate global inflation at the end of the year. An interesting situation is possible. Amid inflation, a large amount of free money will be used to purchase securities. And it will be possible to observe returns even in emerging markets below inflation.
In Russia, they don’t like to “heal” the economy with money; they are not going to give much support to business. The announced measures are not only half-hearted, but even “quarterly” are not pulled. Oil can hang in the range of 30-40 dollars per barrel almost until the end of the year. Plus a significant decrease in oil production. Plus, lower prices and demand for other export commodities. Plus inflation and unemployment, lower domestic demand.
Please share your forecast: how will the world economy behave in the second quarter of 2020? Will macroeconomic trends, formed at the beginning of the year, fundamentally change?
The second quarter is already in the middle. And it is not necessary to wait for the global economy to cope with the crisis by the end of the quarter. Although, if we assume that the crisis is when oil is below $ 20 per barrel, then prices above 30 are already good. The crisis come for a long time, from the positive aspects we can only expect a slight decrease in volatility due to the arrival of a deeper understanding of the current situation. For investors, it seems that the future situation will not be so bad, with the coming of additional funds to the markets, prices will rise.
Dmitry Vladimirovich, what strategy do you follow in the crisis – to save, look for reliable options for investing money, or, conversely, spend and, for example, invest in yourself?
I continue to invest. There is no sense in selling everything in a panic, it is better to buy in a panic. Especially buy margin calls on really good reliable securities.
Could you please share your options and investment principles that you currently use and consider effective.
My investment principles are similar both at the time of the crisis and at the time of a calm market. The only difference is that after the crisis you can earn more.
In the market, I always sell and buy ideas. Based on an analysis of the situation, I find papers that, in my opinion, have maximum growth potential in the next one – three weeks. And buy them. If after two weeks it becomes clear that the idea has not been realized, or, conversely, is fully realized, I sell paper and buy another idea.
It happens that the idea has not been realized or partly realized during this time, but I still consider it promising, then the paper remains in my portfolio, but not for too long.
And most important, I do not invest in markets in which I am poorly versed and do not understand them. This is roulette.
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According to the Knight Frank consulting company, prices are expected to rise...