Scaling up Capital Markets: Insights from the 6th AFME Key Performance Indicators Report
Eurocrowd, together with other leading trade associations in Brussels is proud to have been able to support AFME for the 6th year in time with the Capital Market Report, a key impact monitor of the progress European politics under the Capital Market Union has in the financial markets. This comprehensive report was developed in collaboration with Alternative Credit Council, Business Angels Europe, Climate Bonds Initiative, European Business Angel Network (EBAN), European Fund and Asset Management Association (EFAMA), European Issuers, European Investors, Federation of European Securities Exchanges (FESE), Invest Europe and Pensions Europe.
The event was highly successful, with positive contributions from various speakers. During the strategic discussion on the future of the Capital Markets Union (CMU) within the Eurogroup, Marcel Haag, Director of Horizontal Policies at DG FISMA, European Commission, emphasized the significance of the AFME report in complementing the Commission's efforts to monitor progress toward CMU objectives.
Highlighting the existing challenges, Mr. Haag pointed out that the progress toward completing CMU actions is still fragmented due to prolonged legislative processes, economic uncertainties, and rising interest rates. He underscored the crucial link between Banking Union and CMU and stressed the need to shift from a reliance on bank-based funding to market-based funding.
Notable speakers included Stefano Mazzocchi, AFME's Managing Director of Advocacy; Florence Bindelle, Secretary General of EuropeanIssuers; Jack Inglis, CEO of AIMA - The Alternative Investment Management Association; Rainer Riess, Director General of the Federation of European Securities Exchanges; and Tanguy van de WERVE, Director General of the EFAMA.
These panelists expressed their full support for the objectives of the Capital Markets Union (CMU), acknowledging that differences with policymakers might arise concerning the methods to achieve these goals. The AFME report's indicators highlighted a gap between the EU and the US, which could potentially widen. However, positive elements, such as the EU's global leadership in Environmental, Social, and Governance (ESG) and European Long-Term Investment Funds (ELTIFs), provided a basis for optimism.
This year’s report shows a mixed picture, revealing no discernible medium-term advancement on the CMU key performance indicators.
This edition also coincides with the 30th anniversary of the Single Market. Here too, the data points show minimal change in the development of the EU's capital markets on a global scale.
Adam Farkas, Chief Executive of AFME, said: “All the planned measures from the CMU Action Plan of 2020 have now been delivered by the Commission and EU leaders earlier this year committed to finalising negotiations on any open CMU issues before the next EU elections. However, certain goals, such as rebalancing the EU's funding sources toward more market-based financing, channelling individual savings into productive investments, and integrating national capital markets to create a unified EU market have not yet materialised to any meaningful degree.
“It is clear that the financing structure of the EU economy will need to adapt, and at pace, if it is to support the EU’s significant and transformative investment needs, including the fast-approaching climate goals of 2030, as well as its demographic and competitiveness challenges.
“Ahead of the next legislative cycle commencing, a strategic discussion on the best way forward will take place within the Eurogroup to set out recommendations for the next Commission. These recommendations are highly anticipated by the capital markets industry. The growth of an integrated capital market for Europe must continue to be a key priority if the European Union is to achieve its dual goals of sustainable and digital economic transformation.”
Read the full report here.
Notable takeaways include household market investments lagging the UK and US, ESG investments decreasing, low levels of securitization and loan transfer in the EU, Stock Exchange IPO and bond markets stagnating over past decades. Additionally, risk capital shows a year-on-year decline with notable dips in the first half of 2023 in Venture Capital and Business Angel activity. Only crowdfunding seemed to have maintained momentum.
Beating a trend, third-party data seems to suggest the sector is beating the overall downward trend. It remains to be seen if the sector can motivate retail and sophisticated investors to invest anticyclical into the asset classes offered under ECSPR, but this also provides an opportunity for public support of the young sector.
Stock Exchange IPOs:
Stock Exchange Initial Public Offerings (IPOs) constitute only around 7% of the global volume in the European Capital Markets. This indicates a comparatively lower level of new companies entering the public market. Encouraging and facilitating more IPOs could be a vital strategy for fostering innovation, attracting capital, and diversifying investment opportunities within the European financial landscape.
The European bond markets have stagnated at 14%, a figure that has persisted for nearly 30 years. This static state raises questions about the adaptability and dynamism of the bond markets within the European Union. There is a need for initiatives and reforms that can inject vitality into these markets, making them more responsive to evolving economic conditions and investor demands.
Risk capital in the European Capital Markets shows a concerning trend with year-on-year declines and significant dips. This indicates a potential hesitancy or reduced appetite for risk-taking among investors. Addressing this issue requires a nuanced approach, including targeted policies and incentives that encourage a healthier balance between risk and reward, fostering a more resilient and vibrant investment ecosystem.
Environmental, Social, and Governance (ESG) investments, a critical aspect of responsible and sustainable finance, have seen a decline in the European Capital Markets. The percentage has shifted from around 16% to 12.7%, indicating a potential shift in investor priorities. This downturn emphasizes the importance of reinvigorating ESG initiatives and fostering a renewed commitment to sustainable financial practices within the European investment landscape.
Securitization and Loan Transfer:
Securitization and Loan Transfer in the European Union remain at levels well below 0.5% of the GDP. This statistic highlights a relatively untapped potential within the market for securitization and loan transfer. To enhance market efficiency and stimulate economic growth, there is a pressing need for strategies and policies that encourage and facilitate increased activity.
Household Market Investments:
The European Capital Markets are currently facing a disparity in household market investments when compared to the UK and US. Despite being a significant player in the global economic landscape, the European Union's household market investments are only half that of the UK and one-third of the United States. This discrepancy underscores potential growth opportunities within the European market and the need for strategic measures to boost household participation.