Editorial
07.06.2014
By Aivars Jurcans
mergers.lv

Last week I had the privilege to attend the NASDAQ OMX Baltics hosted conference here in Riga to discuss, as the invitation suggested, capital markets as a driver of economic growth and job creation. More information about the event can be found here.

In very simplistic terms, the role of a stock exchange has always been to connect those with more money than ideas with those who might have the winning idea but have no money. How to explain then why the Baltic exchanges have not really taken off?

In this kind of discussion the argument usually goes in circles - more quality issuers are needed to attract investors’ interest while more investors are required to provide liquidity to the market in order to convince the new issuers about the merits of getting listed. The speakers at the forum made a fair attempt to break the circle and to highlight some of the areas that might require some rethinking.

For many issuers the costs associated with getting listed and then meeting all the reporting requirements are quite significant. Reducing this burden might make public listing a more attractive option. Even more so in the Baltics where, as one of the speakers nicely put it, there are primarily nano-cap stocks, with a handful of companies qualifying as small cap. On the other hand, though, transparency and proper governance are critical ingredients of a flourishing stock market, and even with the current regulatory framework there is room for significant improvement.

Pension funds and banks usually get most of the blame for not investing enough into the stock market. This time a number of speakers urged to consider the absence of retail stock market investment culture in the Baltics. Significant amounts of money are placed on deposit with the banks, earning virtually nothing and, with the European Central Bank’s recent decision to move into the new territory of negative interest rates, are about to earn even less. Diverting at least part of these funds to the stock market might significantly boost the demand but such a shift would require a major change in public perception and development of higher risk tolerance among the retail investors. Unfortunately there were no suggestions on how to do this, or even where to start.

How changes in demand affect the markets was well demonstrated the other week when Financial Times reported that the European IPO market has been weakening and estimated that the inflow of US funds into European equities has decreased from USD 10 billion a month to USD 1 billion in 2014. Because of this, seven companies in the UK alone had been forced to withdraw from their planned IPOs during the month of May.

In conclusion, the conference offered an interesting and much-needed debate pointing at some of the root causes of problems but suggesting very little in terms of solutions. It would be fair to say that the event became just another small step on the long path leading in the right direction.


Sincerely,


Aivars Jurcans
editor@mergers.lv

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