Investment Practices in Serbia – A Detailed Report

Jan 11, 2018 | Economics, Research

This report outlines the market inefficiencies of the Belgrade Stock Exchange while examining what role institutional investors currently play in the local capital and money market. Serbian banks, franchised banks, investment funds, and brokerages are considered in the evaluation of Serbia’s potential for active managed funds and retail investment in the future. Publicly available audit reports and financial statements of local market players has been used to evaluate portfolio selection. The conclusion of this examination has been that there is demand for actively managed investment products and retail investment devices, however the infrastructure of the local capital markets is still not ready to sustain the initiative.

A full pdf version is available here: Serbian Investment Practices 2018


Current Equity Investment in Serbia


For many decades the Republic of Serbia has been a largely unexplored and untapped financial market for institutional investors and traders. Political instability, inefficient internal bureaucracy, and repercussions of past historic events still stifling growth has played a role in impeding foreign direct investment and undermined citizens desire to reinvest into their own economy. Only recently has Serbia seen significant investment projects come from overseas that offer the economy a great potential for growth. One of the most rapidly grown industries in Serbia has been in outsourcing. Foreign companies exploit the discounted labor force, low cost of living, and geographic location of Serbia to outsource production of goods, call centers, financial accounting, and consulting. This has brought more capital into the market, helping reduce the unemployment rate, all strengthening the local currency – the Serbian Dinar. [i] [ii]




Figure 1 Due to recent influx of FDI, the M1 money supply in Serbia has increased substantially beyond the pre-2008 crisis level and is now at an ATH.

The Serbian Dinar (RSD) has also shown significant strength in 2017 against the Euro and the U.S Dollar (figure 2). The exchange rate for EURRSD and USDRSD has retraced back to pre 2015 levels. RSD performance in 2017 yielded great results for low-risk investment funds, and the local bond market. [i] [ii]



Figure 2: USDRSD and EURRSD both decreased in value greatly in 2017 crediting monetary and fiscal policies. Serbia aims to support the growth in 2018 by selling Euro reserves.


BELEX Performance

Despite the increasing growth of the economy most of the population remains largely unaware of any principles of investing, nor have had the desire to facilitate themselves with alternative streams of revenue from capital markets. This analyst has observed that most of the youth (under 25 years old) are not aware of the existence of the local BELEX Belgrade Stock Exchange (figure 3). Individuals familiar with the exchange are seldom able to name a handful of companies that trade on the exchange aside from Aerodrom Nikola Tesla a.d. and NIS a.d.  While BELEX continues to face issues in low trading volume and lack of a local popularity amongst individual investors, the BELEX15, BELEXLine, and Wiener Borse SRX indices – all of which reflect BELEX performance – have closed out 2017 at 3-year highs. 2017 proved to be a prosperous year for investors around the world, tracking their ETFs; the SPDR Standard & Poor 500 rose 19%, the Vanguard FTSE Europe 23%, and the MSCI Serbia ETF outperformed them both with a YTD growth of 28%. [i] [ii]




Figure 3: Both BELEX15 and BELEXLine idices have been demonstrating consecutive higher-highs and higher-lows for the most of 2017 marking healthy growth with no indications of over-valued assets.

A limitation of the MSCI Serbia ETF is its lack of diversification, weighted in only two assets (NIS, and AERO). The Wiener Borse SRX index offers a broader composition of seven securities, weighted heavily in industrial goods and services, with significant representation in financial services from Komericijalna Banka. The SRX currently shows a 52-week performance of 10.36%.

When compared with other emerging market indexes, the SRX outperforms the Bosnian and Croatian indices on a normalized return basis for the last 258 trading days (figure 4).[i]


Figure 4: Charted in red is the Wiener Borse Serbian Trading Index (SRX)

Brokerage Representation

The Belgrade Stock Exchange currently posts a list of 32 residing members, three of which market-makers. Despite the vast availability of brokerage resources these organizations provide very limited service offerings. Most members are representative of banks that only facilitate the purchase of BELEX shares with additional low risk portfolio management diversifying in bonds and foreign currency. There appears to be a very small presence of active portfolio management in Serbia due to the lack of volatility and volume in the exchange.

Larger banks such as Raiffeisen AD offer their clients preselected portfolio funds.

Figure 5: Valid as of Q2 2017.

The Raiffeisen World portfolio consists 51.57% of ETFs, 36.94% of Government Bonds, and 11.49% of currency (figure 5). The bank also issues a recommended hold minimum of 5 years. The funds also draws a 2.5% management fee for a portfolio consisting mostly of fixed-income backed securities. As of September 2017, this fund stood at 15.23 million EURO net capitalization. In 2014, its best year, it generates 8.13%, and currently an annualized return of 5.48% (the fund was organized in August 2010). The SPDR Emerging Markets Local Bond ETF does not contain any weight of Serbian fixed income securities. Other investment funds have represented local securities with foreign securities in similar weights. [i]

A great challenge for BELEX and for Serbia is in facilitating a business environment that will bring more volume to the exchange. Current business infrastructure supports passive, growth driven investment styles, but not active fund management and trading.  While portfolio management theory suggests that active portfolio’s will underperform passive ETF investing it does not account for markets where volume is low. Establishing a mechanism and investment behavior geared towards active management would bring more volume to BELEX and increase growth throughout the Serbian equity market.

Retail Investment in Serbia

Recent Alternative Investment Developments

Aside from growth within traditional financial markets, 2017 has seen a rise in alternative investment methods – mainly cryptocurrency. While this analyst does not advocate it’s use, nor comments on its potential application within the Serbian financial market, it’s examination does point to several key factors that can contribute to industry growth.

Bitcoin’s (BTC) meteoric rise in both price and popularity has taught the financial world that most people will invest in any asset without understanding it’s fundamentals merely off of popularity. Cryptocurrency is an appealing investment medium for people from emerging economies, and Serbia, because of two important factors; low barrier of entry, and high profitability.

Barriers of Entry and Risk

Serbian working class citizens have an average monthly wage of 47.575 RSD (400 EUR). Which is not sufficient to invest in a fully diversified portfolio of equity. It would be possible to own equity worth 400 EUR on the Belgrade Stock exchange, but the returns would not warrant the opportunity cost. Assuming an investor chooses to allocate a month’s worth salary into the “Raiffeisen World” portfolio where it is kept for a year. The opportunity cost for investing a month’s salary would not be worth the 11.92 EUR return (after management fees), likewise an investment of 4000 EUR does not warrant the 119.2 EUR return. However, cryptocurrency presented an opportunity with no obligations, promises, or minimum requirements. Bitcoin made an annualized daily return of 3.61% in 2017, and Ripple (XRP) made a total 36,018% return. The same 400 EUR opportunity cost would have translated into 144,000 EUR in one year invested in Ripple. [ii] [iii]

However, every alternative investment is subject to higher or inconceivable measures of risk. Analyzing cryptocurrency risk can provide analysts with measurements of investors risk tolerance under inefficient market forces – as generally the average bitcoin investor is not able to explain the concept of block-chain or what the price of Bitcoin is based up. High kurtosis and tight co-variance amongst other assets, and high idiosyncratic industry risk make it impossible to properly hedge a portfolio. However, most Serbian speculators do not choose to even examine their risks, instead looking at the current market trend and approximating when they will recoup their return on investment., a Serbian based online forum for discussing bitcoin and mining has revealed that many users were selling property and opening cash mortgages with their bank in order to invest in mining equipment necessary for earning bitcoin.

Examining Asset Classes

Although the average wage may be preventing individuals from investing in equity, it is clear that many potential investors have a high enough risk aversion to pursue other investing vehicles. In order to raise the investment volume on the BELEX and encourage retail investment within the population a medium must be able to provide a low barrier of entry, an attractive investment benchmark, and highly volatile assets.





With the expansion of the outsourced consulting market many corporations began outsourcing FOREX retention departments to Belgrade and Novi Sad. In addition to the members of the Belgrade Stock Exchange there also exist a number of companies acting as CFD brokerage providers and FOREX consultants. FOREX market investments are highly appealing in part due to ease of execution, and increased buying power and margin (leverage). Commissions are evaded entirely through dealing within the buy/sell spread, and investors can receive access to a multitude of CFD equity offerings – but it’s unsustainable for retail investing.  While margin allows the investor to enter a position 500 times their capital, beating the spread and avoiding downside variance can be very difficult.

Figure 6: Positions subject to automatic stop-charge are presented in black, losses of; 75% and more – grey, 50% – 75% red, 25%-50% orange, 10%-25% yellow, 10% and less in green.

A position entered for 100 USD will automatically close on a stop charge order (figure 6) whenever the asset drops by 0.3% at 1:400 leverage. Traders must play an active role in managing their positions with a risk margin, and attempt to enter their positions with the momentum of the market. Even so, stop losses may be clipped and positions exited by shooting stars and hammers, thus making it very difficult to invest and enter a long position.

The graph (figure 7) below shows the backtracked potential earnings on holding an SP500 SPDR ETF for 15 days during the last 5 years. Presented are all positions entered including when stop charge orders should have been activated and positions closed before more losses were incurred.

Figure 7 Back tested for adj. SPY prices 17.11.2017 – 20.11.2017

Due to the attention-demanding nature of equity backed CFD trading – opinions in Serbia remain split. Many consider Forex and CFD instruments to be no different from binary options and fraudulent investments where only the issuing company profits, and others are simply demotivated by initial losses and lose all interest in the stock market investing. Finally, facilitating more FOREX transactions does nothing for the Serbian economy and only draws more capital away from the local exchange.

BELEX Capital Market Inefficiencies

Equity offerings represented on the BELEX consist mostly of value stocks; 55% of shares trade lower than 1000 RSD (8.42 EUR) (Figures 8, 9). Due to low volume many standard class shares are forced are moved into the MTP market, a self-regulated market for shares that no longer meet blue-chip exchange requirements. MTP (minimum trade price) shares have fixed prices and is not impacted by trading volume. Out of 634 companies listed on the BELEX, only 32 trade on the open market. [i]


Figure 8: Of the 201 bottom priced stocks – 41 are priced below $1 equivalent 99 RSD, with the cheapest stock priced at 10 RSD. The most expensive asset trading on BELEX is “Novinsko-izdavačko društvo kompanija Novosti AD” Belgrade news agency (224.000 RSD MTP)

Figure 9: 32 assets across all sectors should offer sufficient diversification to establish a medium risk passive portfolio, but not enough variety for active management high-risk trading.

Figure 10: Refer to Index section for table.

The BELEX open market capitalization is weighted heavily in mining, transportation, and manufacturing. This comes as to no surprise as two of the largest companies in Serbia are Gazprom subsidiary NIS a.d. and Aerodrom Nikola Tesla.  Surprisingly underrepresented in the open market is the agricultural sector, which accounts for more than one Billion USD of exports for Serbia every year.  Insofar as trading market securities on the Belgrade Stock Exchange, a lack of diversification amongst sectors and vast amount of MTP securities has caused trading inefficiencies within the market. [i]


Figure 11: Refer to index section for table.

Although both BELEX15 and BELEXLine indices have been rising since 2015, supported by a strengthening economic outlook and bullish investor sentiment – transaction volume has continued to decrease (figure 12). Institutional and market-maker appetite for BELEX stock is weakening and forcing more open-market assets under reorganization into the MTP market. [i]


Figure 12: Refer to Index Section for table.

Solutions to Volume Driven Problems

Mobile brokerage services such as RobinHood could offer a potential solution for bringing additional volume to the Serbian investment market.  RobinHood has been credited with generating market-relevant levels of volume during initial public offerings (IPO) and for small cap value companies in the United States. The accessibility and lack of traditional complexity in purchasing shares has caused the investment process to be oversimplified and barriers of entry lowered. Mobile banking has seen popularity within the Serbian market in facilitating internal banking and credit/debit card transactions for clients. The Serbian investment market loses its capitalization by not adopting a similar streamlined approach towards investing that goes beyond FOREX trading and binary options, but addresses real equity.

There is a demand for an investment vehicle with no deposit or account minimum obligations. This can be delivered through low buy-in mutual funds, or mobile brokerage platforms, but whatever the medium – local asset representation is pivotal in generating retail investment interest in the domestic stock exchange. Discounted asset pricing and commission waiver can be achieved by managing order flow to specific market-makers, and in generating additional income through cash interest on unused account margins (assuming economies of scale and brokerage popularity). Negating fiduciary responsibilities in acting solely as a service provider and putting instant access to the BELEX exchange, as well as potentially international assets, would bring more volatility to the BELEX.

Mobile Small Cap Value Investing in the U.S.

Simplifying the investment process in the United States of America has brought volume and volatility to small cap markets through applications like RobinHood.

RobinHood, a brokerage service used in the United States that trades only equity stock. The company is known for charging 0 USD per trade, but limiting the amount of trades that can be made per asset in order to mitigate day trading, and teach their clients to buy and hold equity. [i] Additionally, the platform is limited in order types; users are unable to sell a stock short for instance.[ii] Most importantly, there is no minimum deposit, and the platform is able to trade OTC securities, many of which fall into the small-cap value category, and can be purchased for under a dollar per share. Small-cap value stocks are highly volatile and provide the users with extra excitement because of their low price.



Figure 13: Infrequent price movements at low volume and price – typical characteristics of small cap dollar stocks on OTC US markets.

Many company stocks have lost their management to legal issues, or have gone temporarily out of business and have had their price depreciate to close to 0 USD. Other companies have strong fundamentals and research projects, but still no cash flows. Most of the companies will not experience a stock rally, but at the same time are still very sensitive to volume making them worth considering for short-term gains. [i]


Figure 14: After facing management and legal issues, the production fundamentals still stood out to investors and prompted a strong rally for Insys Therapeutics towards the end of 2017.

Many low priced securities on the US OTC market could easily have been placed into MTP markets, however they remain afloat on the exchange and are subject to each individual investor speculation. A system in which volume is interpreted as good faith and attention allows many otherwise mismanaged companies to generate funding necessary for growth. Consequentially, more volume for BELEX should allow companies to raise their assets from MTP markets and into open trading.

Institutional Use of Local Securities Markets

Many banking institutions in Serbia currently have little to no local security market representation within their portfolios. Banks operating in dynamic developed markets offer local securities representation in their funds and encourage support of the local securities market. Many brokerages also offer incentives to their clients for leveraging their portfolios with local equity.

Komercijalna Banka (KomBank) currently markets one of the most popular investment funds in Serbia that has local security representation. The KomBank INFOND offers a benchmark for other investment funds in Serbia to follow. A common investment banking practice in Serbia is investment fund crossholding – in which different investment funds hold stakes in each other’s funds. [i]


Figure 15: KomBank’s InFond currently has the largest local equity asset allocation in the market.

As seen in Figure 16, which outlines the top five positions held in the fund as of 28.3.2017, the fund is weighted heavily in Serbian bonds (1 and 2). Serbian bonds are still a staple in banking investment portfolios in Serbia because they offer no exchange risk for the investor and the bank.  Their top three equity holdings are in Impol a.d. – an aluminium manufacturing company with significant exports into Russia and Germany, Messer Tehnogas – specializing in gas production and transportation, and Aerodrom Nikola Tesla – Serbia’s largest commercial airport.

Figure 16: KomBank IN FOND top 5 positions as of 28.3.2017

While banks remain the financial industry’s backbone and active fund management in Serbia has not been introduced, Ilirika Investments a.d. has been working to present the investment market with additional financial products. Ilirika Investments is a brokerage and investment management firm headquarted in Belgrade, Serbia, with offices in Croatia, Macedonia and Slovenia. Similarly to KomBank IN FOND and Raiffeisen CASH, Ilirika’s investment products contain significant local security representation, albeit less notably local equity. [i] [ii]

The top performing fund last year, ILIRIKA Cash Dinar, is very similar in asset selection as Raiffeisen CASH; both are based on cash and bank depositories in local institutions. It has been the choice for conservative investors, and brings no volume or consideration to local capital markets.




Figure 17: ILIRIKA fund performance data valid as of 5.1.2017.

ILIRIKA Cash Euro performed the worst out of the five investment funds in 2017 (Figure 17), much like Raiffeisen EURO CASH. As a result, these funds experienced a strong investment outflow which has been redistributed to the RSD denominated funds with higher local asset representation (Figure 18) [i].  The investment outflow is expected as the fund was rated 1/7 by Ilirika – for highly risk averse and conservative investors. Despite the failure to manage risk in low-risk funds, Ilirika Dynamic and Balanced funds underperformed less while boasting high risk premiums. Studying the correlation between Serbian investment fund performance and local securities representation does not yield conclusive results. However, the local market proved to function as an adequate hedge for international bond markets and currencies.


Figure 18: Raiffeisen Invest Serbia client member addition reports, based off Q2 summary. Significant client outflow from the underperforming EUROCash fund, and inflow into the domestic Raiffeisen CASH fund.

The Balanced portfolio holdings review also notes the use of KomBank IN FOND in their holdings, which accounts for an adjusted local capital markets holding of 4.47%, while the actual fund consists only of 0.2% local equity selected by Ilirika. KomBank IN FOND holds shares of Ilirika Balanced and Cash Euro funds, and Firma ProActive fund shares. The Balanced fund performed poorly in 2017 effecting KomBank’s performance and causing results to not meet average expectations.

Ilirika Triumph performed poorly in 2017 despite being marked the flagship international investment fund. The Triumph and Dynamic funds were founded shortly preceding economic instability with two different asset selection strategies. Despite a tumultuous beginning for the Triumph fund, it has not failed to perform in the last year, as can be seen in the table below (figure 19). According to the balance sheets made available by Ilirika on their website, Serbian securities generated a return of 329% for the 2016 year. A full 2017 performance analysis is to still be released.

Figure 19: Top 5% Ilirika Triumph holdings as of 5.1.2017 were heavily weighted in the MTP Zastava stock from Belex.

Ilirika Dynamic represents the only other open investment fund to be weighted this heavily in international capital markets in Serbia. As many US equity heavy funds emerge from initial shortfall it will be important to reexamine the historical performance of Ilirika’s equity funds at the end of 2018, as well as review their any changes in asset selections that will reflect the strength of the local market in 2017.



Serbia has proven itself to be a powerful emerging market economy over the last few years. It has shown growth in capital markets in what is still a poor financial setting. Recent foreign direct investment and EU funding is visible beyond municipal infrastructure reparations, but also extends to local financial bond markets and the Serbian Dinar. Additionally, an increased money supply and slowly increasing average weight is contributing to a higher amount of willing market participants that have no adequate investment channel through for value investments at minimal capital. Instead interested parties subject themselves to poor and uneducated investment decisions that yield little financial gain and further distance their capital from the domestic economy. Retail investment strategies from U.S. capital markets allow investors to help generate the additional volume needed on the Belgrade Stock Exchange that would warrant the attention of local value investors. Despite success evident in measures of Serbia’s economic development it would be unjust and financially irresponsible not to tend to the market inefficiency existent within Serbia’s capital markets. The same care and same attention that saw the success of Serbia’s money markets should be applied to capital markets in 2018. Only in innovation of traditional investment practices can institutions be given the tools and securities needed to expose their existent clients to further domestic investment opportunities. However, as for this moment Serbia’s developing economy still remains shadowed my market inefficiencies.


Index section available in the downloadable pdf file here.