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European Affairs
Good and Bad News for Europe's Stock Markets
by Church Lewis, Boston, MA
I was glad to see Alain Monod-Broca's article "The Revolution in Europe's Stock Markets: A View from Paris" in your inaugural issue since it draws attention to the very profound and exciting changes occurring in European equity markets. I feel, however, that the article was also notable for its omissions on this important topic.
The good news in Europe for issuers seeking to raise equity capital and investors looking for superior rates of return is that:
In the run-up to the euro, capital has been redirected away from debt securities toward equity.
Border barriers to capital flows have disappeared in Euroland, increasing potential capital access for each publicly traded stock.
Investment assets are grow-ing with the rise in pension funding and the increase in investment activity by private (retail) investors.
All of the above have caused demand to exceed the supply of equity securities, which by market capitalization relative to GDP in the euro-area is still less than one-half the level in the United States.
The bad news is that Europe's equity stock market continues to be highly fragmented, confronting issuers and investors seeking to benefit from the otherwise positive conditions for equity in Europe with confusion and uncertainty. The confederation model which Mr. Monod-Broca espouses and identifies in the Euro NM network of markets for smaller companies and the London-Frankfurt alliance of markets for larger companies has generally been criticized as unconducive to making decisions on critical issues such as trading platforms, computer systems and settlement arrangements.
The inevitability of seeing issues from the perspective of existing national institutions and the impulse to defend their interests and survival have undermined the aim of reaching a broader, pan-European solution. Therefore, Euro NM and London-Frankfurt as market networks have little to show for themselves.
EASDAQ, a new pan-European market launched at the end of 1996, partly in the belief that a supranational vision and operating model could not grow out of existing national markets, has been slower than hoped in attracting new listings. But it has attracted the support of powerful financial intermediary firms, particularly since announcing that it would use its electronic trading platform with member market makers in 11 countries to trade European equities wherever listed.
Other entrants have joined the race to create a pan-European market, particularly one with the broad access and disintermediation that should be possible in the internet era. NASDAQ of the United States announced its plan to set up a European market several months ago, and the holding company for the Swedish Exchange recently announced a joint venture with Morgan Stanley Dean Witter to launch a market catering to online traders called Jiway. EASDAQ, however, has a 12- to 18-month headstart over these initiatives.
At least this burst of activity is testimony to the opportunity that many perceive in the European equity markets. The most dramatic evidence of this opportunity lies in the outstanding performance of the indices for the new markets which have formed to bring together new, entrepreneurial companies' quest for capital and in the European investors, institutional and private, who have awakened to the rewards inherent in growth companies as an asset class. EASDAQ appreciated 87 percent, Germany's Neuer Markt 66 percent, and France's Nouveau Marché 135 percent in 1999. In this respect, I agree with Mr. Monod-Broca that the view from Paris is very good.
(Church Lewis is Chairman of European Growth Investment, LLC, which is raising an investment fund to track the performance of the new technology growth company markets in Europe.)