European stock exchange markets are drying up since 2007.
The observation has been made by French asset manager La Financière de l’Echiquier (LFDE) which has partnered with research centre MiddleNext to publish a pan-European study about the importance of listed small and mid caps covering the 2000-2014 period.
The manager warns the stock exchange market model in Europe will suffer from the drop of listed micro and small caps, that form 80% of all current listed companies (93% with mid caps) and 6% of all Europe market cap (20% including mid caps), if measures are not implemented to favour investments in those segments.
”The research brings concrete answers and figures to face commonplaces we have been hearing for ages regarding small and mid caps. It shows that European micro, small and mid caps are not as risky and volatile as the markets pretend they are. Those findings are key in a period when regulators look at categorising researches per management style,” Didier Le Menestrel (pictured), chairman of LFDE, tells InvestmentEurope.
LFDE’s report finds out that the number of listed companies, all segments gathered, rose by 64% between 2000 and 2014 but the increase has occurred between 2000 and 2007 with a 90% rise stressed. The manager points out the economic and political environment Europe faced during the 2000-2007 period has favoured small and mid caps’ initial public offerings.
However, the trend reversed since 2007. The global amount of listed firms on the European stock exchange markets went down 16.5% between 2007 and 2014. It has first impacted listed micro and small caps whose number has decreased by 20% between 2007 and 2014 whilst those of mid and large caps only dropped by 5%.
As 10% of all listed companies gather 80% of the market cap, the good health of the European financial industry relies primarily on large caps. The economic impact of the drop in micro and small listed companies therefore shall be limited, the research suggests.
Nonetheless, Gael Faijean, fund manager, head of quantitative analysis at LFDE and research coordinator, tells InvestmentEurope that the stock exchange market’s model must be seen as an age pyramid, in which all segments are dependent from each other.
Two figures in LFDE’s report point up the correlation. Over half (56%) of large caps listed on the European stock exchange markets in 2014 were small/mid caps in 2000 and one in four small/mid caps has changed category between 2004 and 2014.
”The caps’ pyramid is ageing. Its base shrinks because the renewal at the bottom is not ensured. Several companies exit the stock exchange listings every year (250 in Europe in 2014) and we only spot a very few initial public offerings. This is abnormal,” he says, referring to micro and small caps as the plankton of the stock exchange market model.
“The research reveals that the situation of listed small and mid caps is worse than expected. We shall realise that the interdependence between all segments is vital for the stock exchange system as well as for the global economy itself. If the regulator cuts the links between small, mid and large caps, the whole ecosystem is in danger,” Faijean adds.
LFDE’s report highlights the risk that the decrease of listed small and mid caps could speed up those of listed large caps at the same pace micro and small caps have faced it.
”If nothing changes, the drop in listed micro and small caps will pursue over the coming years despite the fact that some companies carrying innovative projects are about to be listed. I fear that in the end some large caps only remain,” Le Menestrel sums up, comparing large caps to ready to wear and small/mid caps to haute couture.
“Without haute couture, “prêt-a-porter” (ready to wear) would not exist,” he underlines.