04.08.2015
By Terry Flanagan

Investors To Benefit from European Capital Markets Union

Norman Boersma, chief investment officer of Templeton Global Equity Group, said investors are likely to benefit from increased liquidity and stability under the proposed European capital markets union.

“We believe the initiative should help improve liquidity and expand investment options,” he said in a note.

Boersma added that although Franklin Templeton invests in European banks, the firm recognises that the growth of the corporate sector in the region is being held back by too much reliance on bank lending. He said that in Europe banks provide about 70% of external financing for corporations, while in the US about 70% comes from securities markets.

As a result, the US is much better at matching different investors with borrowers and has a more robust venture capital and private equity industry. The increased use of asset-backed securities would also take loans off bank balance sheets, allowing them to make more loans.

“We are generally supportive of any “pro-European” measures that help improve systemic integration across the monetary union,” Boersma added. “We expect that Europe, which remains a major focus in our equity portfolios, is likely to ultimately benefit from these initiatives.”

In January the European Union Commission issued a consultation paper on a proposed capital markets union across all 28 member states as the EU’s stock markets, equity markets and venture capital markets are less developed than comparable economies.

“US public stock markets are almost double in size (stock market capitalisation is 138% of GDP in the US vs. 64.5% in the EU in 2013),” said the paper. “Relative to the size of the economy, stock market capitalisation in China exceeds that of the EU.”

The EU Commission has asked for feedback from the European Parliament and the Council, other EU institutions, national parliaments, businesses and the financial sector by 13 May 2015. The Commission will then adopt an action plan this summer setting out its roadmap and timeline for putting in place the building blocks of a capital markets union by 2019.

The European Fund and Asset Management Association, which represents about €17 trillion in assets, has said a single market for personal pensions across the European Union will also play an important role in broadening capital markets the region.

Peter De Proft, director general of EFAMA, said in a statement: “Our proposal is to create a new type of pension product that could be offered to EU citizens in addition to the pension products currently available at national level”.

The Investment Association, which represents UK fund managers, has said the EU should follow the logic of the Ucits legislation which allows funds to be sold to any investor in the region under a harmonised regulatory regime.

Richard Metcalfe, Director of Regulatory Affairs at The Investment Association, said in a statement: “That may require imagination, exploring how digital options could improve product availability and support investor decision-making. It certainly needs a consistent approach to investor protection, which does not currently operate to the same high standard for all investment products.”

Featured image via Dollar Photo Club

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