In charts: why European stock markets are in crisis
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Europe’s equity markets are at a record high but beneath the surface they are in crisis. Trading volumes are sinking, initial public offerings are scarce and some of its biggest companies prefer the appeal of the US.
The lacklustre activity has jolted the region’s policymakers into action. They are trying to revive their faltering markets with incentives designed to boost investment in domestic companies and encourage businesses to list at home.
Yet those ambitions are littered with political, financial and cultural obstacles that for years have proven overwhelming. Meanwhile the US market grows ever larger.
“Capital markets is on the political agenda in pretty much every finance ministry across Europe,” said William Wright, founder of markets think-tank New Financial. “It’s a hugely challenging political, cultural problem.”
1. What’s the problem in Europe and why does it matter?
Before the financial crisis the performance of the main US and European stock markets closely followed each other, even if Europe lagged behind Wall Street.
But since 2008 the gap has widened markedly. Driven by the growth of Silicon Valley’s technology giants, the US market’s relentless rise has sucked in more money from asset managers and pension funds around the world, creating a virtuous cycle.
2. What’s missing? Silicon Valley rocket fuel
European markets’ lack of vigour has multiple causes. The region’s economic performance since the 2008 financial crisis has been far more sluggish than that of the US.
Europe also lacks the fast-growing tech companies that have powered the meteoric rise of US stocks, while local investors have historically been more risk averse than their American peers and less eager to back new companies that are yet to turn a profit.
In that same period, China and India have emerged as dynamic capital markets, with a stream of new companies listing domestically.
European market structure is complex, especially compared with the US, which has few listing venues and one clearing house through which trades are finalised.
US market structure
3
Listing exchanges
16
Trading exchanges
1
Central clearing house
By contrast, almost every European country has its own listing venue, which politicians often consider a source of national pride. Stock trading and post-trade activities take place in many markets, which splits up liquidity.
European market structure
35
Listing exchanges
41
Trading exchanges
18
Central clearing houses
In the UK, pension funds have faced pressure from regulators to cover their liabilities with investments into bonds. Their holdings of UK-listed stocks have subsequently plunged over decades.
Retail investment exploded during the coronavirus pandemic in the US as ordinary people poured their government stimulus money into meme stocks. Europe, however, lacks a booming mainstream retail investment culture.
3. Europe’s fractured response
Supercharging Europe’s capital markets to fuel their domestic economies is a crucial issue for politicians.
But the solution itself is complex, especially in the EU, which has 27 member states. Rules on trading are being rewritten in Brussels, while individual countries are also tweaking their own regulations in an effort to boost their national markets.
EU politicians are fervently trying to unlock growth via an ambitious Capital Markets Union plan, which involves making it easier for companies to list and for investors to back them.
Last month Brussels agreed a new listing act that includes making IPOs use plainer language and allowing company founders to retain greater control through shares with more voting weight than other investors.
In the UK, chancellor Jeremy Hunt has launched a series of measures to help London create and retain more high-growth companies. These include funnelling pension money into start-ups and simplifying the IPO documents that companies share with investors. The UK’s financial regulator is also planning on overhauling listing categories.
The UK and EU are both developing live share trading databases to bundle together basic trading information such as prices and deal sizes. Supporters said it would make Europe’s stock trading more transparent and attractive to international investors.
Jeremy Hunt, UK Chancellor
‘I want the world’s fastest growing companies to grow and list right here, making LSE not just Europe’s Nasdaq but much more . . . we want it to be the global capital for capital’
Giorgia Meloni, Italian Prime Minister
‘The rule allows us to attract investments compared to something that has not always worked in the past’
Individual EU countries are taking their own national measures. Italian prime minister Giorgia Meloni is pushing through a controversial “capital bill” that aims to make going public more attractive and to keep companies listed in Italy.
Germany’s Financing for the Future Act passed late last year. The threshold for a business to be able to go public has been lowered from a minimum market capitalisation of €1.25mn to €1mn, while the tax allowance for employee share ownership has increased to make holding stock more appealing.
However, comments from the French finance minister Bruno Le Maire typify growing frustration with the pace of progress in reviving the EU’s capital markets.
Last month he suggested three or four countries should forge ahead in accelerating the capital markets union, by creating a savings product together and allowing joint oversight of their markets.
Christian Lindner, Federal Minister of Finance Germany
‘We must ensure that global technology leaders do not just emerge in Silicon Valley, but that they also find a home in Germany. We need to improve the environment for start-ups’
Bruno Le Maire, French finance minister
‘I am fed up with discussions. I am fed up with empty statements. Do you really think that China and the United States will be impressed by our statements? We need decisions and we need strong decisions’
European politicians are ultimately hoping to create policies and incentives that fuel a virtuous cycle of more investment into the region’s companies, better performing stock markets, more liquidity and trading, and highly-competitive businesses and economies.
The results may take years to materialise.
“In isolation any single policy announcement is going to look pretty underwhelming,” New Financial’s Wright said. “But in aggregate and over time I think they will have a significant impact.”
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