18 July 2013

Peter Montagnon: Our shrinking equity markets

One of the little-noticed features of the international capital market is that listed equity markets are shrinking around the world. This is true both in north America and Europe, and yet there has been hardly any debate about it – until now. The European Commission's green paper on long-term finance provides an opportunity to question this trend as we seek to re-design our markets in the wake of the banking crisis. 

In particular, Europe needs to consider how to develop pools of long-term capital incentivised, through fiscal or other means, to invest in equities. While two decades ago such incentives existed for both the insurance and pensions industry, these have been eroded through regulation such as the Solvency Directive. Now, European markets are relying too heavily on overseas investors to provide long-term investment

The Commission should examine the reasons for the declining participation of insurers and pension funds in equity investment, and the role played by solvency requirements in this. It should examine the costs inherent in the equity-investment chain and address those which are the result of market failure or misdirected regulation. Finally, it should seek to avoid legislation that places an unfair burden on the listed sector.

An ability to access capital at reasonable rates will become increasingly important to Europe's competitiveness as other fast-growing regions seek to obtain a greater share of limited supply. Global wealth is flowing to emerging economies. We need to consider how Europe can rebuild an environment in which investment can flourish.

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