The launch of the Newex in November last year was heralded as a sign of further of the consolidation of exchanges across Europe. The declared aim of Newex is to “develop a new market, by setting up an exchange with the recognised standards of a regulated European market designed for the central and eastern European segment”.
The success or failure of the project depends upon whether we can really compare the eastern European sector to new technology stocks. That is, will Newex come to be seen as similar to the Neuer Markt, in that it will create a market with a distinct profile for both issuers and investors? “The aim is to create a new market with recognised high standards, a market that will bring central and eastern Europe enterprises seeking capital together with western European investors who are seeking attractive investment opportunities,” says Volker Potthoff, a member of the supervisory board at Newex.
The first part of this philosophy seems to be developing well, with around 90 companies committed to the basic and quality segments of the exchange, with around 40% of them likely to be on board by the end of this year. The majority of the companies will appear in the former category, although a small number of companies have been admitted to the segment. In total around 40% of the companies listed come from Russia, 20% from Hungary and around 10% from the Czech Republic. Other participating countries include Ukraine, Estonia, Kazakhstan, Poland, Slovakia and Austria.
Unsurprisingly, the largest sector is telecoms, with over 20% of the whole listing, followed by the oil, banking and energy sectors. This predictable list follows the privatisation programmes, which have been under way in many of these countries. The segment is aimed at companies seeking a second listing in addition to that enjoyed in their home country, with designed for IPOs and the raising of capital.
Deutsche Börse and Wiener Börse claim to be exploiting synergies rather than creating redundancies by pooling their eastern Europe activities in the new exchange. “We are developing a market that is attuned to the investors’ and issuers’ needs, and exploiting synergies to minimise costs,” says Potthoff. But is that really the case?
Newex officials say that the new exchange does not see itself as a rival to the existing exchanges in eastern and central Europe, but rather as a complementary market, pointing to proposed cooperation with MICEX in Moscow and BSE in Sofia as evidence of this. It is significant that some of the larger exchanges are less enthusiastic. When Newex was first mooted Budapest, Prague and Warsaw were less than enthusiastic about link-ups. Given how two of those exchanges have performed it is hardly surprising that they are not cheering the prospect of secondary European listings among their blue chip companies.
In Hungary, Estonia and Latvia companies listed abroad account for one third of domestic market capitalisation.
On average, the value of shares traded abroad is almost half of the value traded on local markets, and the number of shares traded abroad is twice as high as the number traded locally. The turnover of Russian depository receipts in Frankfurt, for example, was more than twice as high in the first three quarters of 1999 than in the same instrument in Moscow. Poor corporate governance can be blamed for migration in some countries, but countries with good investor protection are also suffering. Typically it is the larger firms which seek listings abroad, but this trend has also been seen among new technology companies, particularly in Hungary and the Czech Republic.
The disappearance of companies which only trade domestically deprives local exchanges of liquidity. This inevitably discourages foreign investors from considering remaining stock. Even the larger stock markets in transitional economies will be hurt by this trend.
Newex may claim to be “exploiting synergies” but some in eastern and central Europe will accuse the exchange of cherry-picking, provoking serious consequences for exchanges in the region.