| Majority of global new markets fail to deliver |
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| More than half (22) of all global new markets (38) are merely existing without much of a purpose, some, including Portugal's Novo Mercado, failing to attract companies and funds altogether, Paul McCann writes. Others however, such as London’s Alternative Investment Market, continue to go from strength to strength, attracting companies such as Ireland’s CNG. |
During 2003, global new markets have enjoyed a protracted and steady recovery that has seen market liquidity improve and volatility drop substantially. The improvements come despite the war in Iraq, which has failed to knock the recovery of new markets off course. However, despite a number of new markets becoming more credible by gradually improving performance and attracting quality companies, more than half (22) of all global new markets (38) are merely existing without much of a purpose, some failing to attract companies and funds altogether (source: Grant Thornton’s Global New Markets Guide 2004).
KOSDAQ was the world’s most liquid new market in 2003, almost three times Japan’s high performing Mothers Market, which enjoyed three times as much liquidity as the previouss year. In 2003, volatility reduced across all new markets except GEM. Most markets had volatility of between 2 per cent and 8 per cent during 2001 and 2002, but during 2003 the maximum was 4 per cent (1 per cent on AIM) reflecting the gradual index appreciation during the year. In terms of attracting new listings, global new markets achieved mixed success. KOSDAQ was the best performer with a growth in average listings of 55 during the year, followed by AIM with an increase of 43 listings. In terms of average market capitalisation, UK and US markets all reported notable gains thanks to larger companies joining, whilst the Asia-Pacific region remained stable with only SESDAQ and the Mothers Market recording an increase.
The world’s new markets, broadly defined as those appealing to younger, high growth companies, once the toast of the investment community, have suffered badly since the peak of the global economy in March/April 2000. A two-year downward trend only began to regain lost ground towards the end of the first quarter of 2003, and has since kept edging forwards in a steady but protracted way. The war in Iraq appears to have had little impact on the performance of the new markets. Much more damaging appears to have been the period of uncertainty leading up to the war which coincided with the bottoming out of the downturn and undoubtedly contributed to shaking investor confidence.
2003 has seen several new markets impress the investment community by attracting new companies and delivering solid performances. Other markets have been a complete disaster; by the end of the year a total of four closed their doors whilst over half of them remain in a chronic vegetative state.
Some new markets such as Portugal’s Novo Mercado have been in operation four years and have still not managed to attract a single company, whilst other exchanges that have few companies listed have been totally unable to raise any funding whatsoever. A large number are failing to attract new companies in order to achieve any critical mass or command respect from investors.
In order to evaluate global new markets, a generous analytical criteria of looking at only those markets that have been in operation for more than three years, have at least 40 companies listed and a $2bn market cap would see just 10 markets pass the test. Even amongst these, only NASDAQ (US), AIM, KOSDAQ, TSX-V, and only as of last year, OFEX, can be said to have added any real value to investors during 2003. OFEX, the newcomer to this group, between 2002 and 2003, increased its average market cap per company by 233 per cent, from $12 million to $40 million.
Markets such as GEM, the Mothers Market and SESDAQ have continued to produce some encouraging results but still fall short of delivering substantial returns.
Last year Grant Thornton predicted a quarter of new markets would close by 2005. Over the last twelve months, around 10 per cent of the world’s new markets have ceased to operate, making that prediction look ever likely.
Overall, despite the proliferation of new markets around the world, companies looking to float have little choice but to turn to their domestic markets as it is still difficult to find brokers that will support foreign shares. The sheer complexity of admission rules on many exchanges also continues to put company directors off.
However, things are getting better, various exchanges such as AIM have introduced steps to make it easier for foreign companies to achieve a dual listing which together with improving corporate governance standards is making brokers much more willing to back foreign companies. For many companies a dual listing in a market rich with customers or suppliers can be a very good move, likewise being listed on an exchange with a good reputation for funding in a particular sector such as London or Toronto for mining and New York for technology is a natural step to take to support a company’s growth strategy.
Overall, the next two years are likely to see a further shake out in the number of new markets with the best performing ones going from strength to strength. As for the others either their governments will keep them artificially alive or closure beckons. Closing new markets may be replaced by ‘markets within markets’, a concept some exchanges are developing by allowing investors to track the performances of different categories of companies through the use of indices rather than expensive and unproductive separate markets. |
Paul McCann is a corporate services partner in Grant Thornton.
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| Article appeared in the July 2004 issue.
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