By Beppe Jaccarini
The market capitalization (“market cap”) on the Malta Stock Exchange (“MSE/the Exchange”) surpassed the €15 billion mark this year, which is an unsurprising achievement given the recent positive trajectory in new listings and initiatives brought forward by the Exchange in recent times. Of the €15 billion market value traded on the Official List, equities comprise €5 billion, government bonds and T-bills amount to €8 billion, whilst corporate bonds make up the remaining €2 billion. With a GDP of €14 billion, Malta’s equity market is achieving a penetration rate of 36%, i.e. the total market cap of listed equities as a percentage of the country’s GDP, as shown in the chart below.
Market cap as a % of GDP and market cap in billions of Euro for the small European countries (Source: Bing powered data as of 2022)
The market cap as a % of GDP data highlights Malta’s encouraging position in the equity markets sphere when pitted against its peers. Despite this, the general local consensus is that there is still plenty of room for growth, particularly when attracting foreign issuers to list on the MSE. In fact, virtually all equities on the local stock market are domestic companies undertaking their main operations on the Maltese islands. By contrast, Luxembourg and Ireland which rank highest for listing penetration and market cap respectively, are composed nearly entirely of international listings. Such context is important to fully understand the untapped potential that underlies if the MSE’s efforts (and the industry’s alike) to attract international listers come to fruition. Perhaps the main competitive challenge in the way of our internationalization journey is the gap that countries such as Ireland and Luxembourg have created in their decades of attracting international listings.
Another element well highlighted by the above chart is the fragmented state of the European equity markets with over 35 listing exchanges, making it even more difficult for the smaller exchanges to gain a foothold and compete with the larger players. By contrast, the US market, which boasts more than double the market cap of the entire European market ($38 trillion vs $17 trillion), operates with 2 main listing exchanges affording obvious advantages in terms of liquidity and economies of scale.
While it may seem a little radical to suggest an overnight consolidation of the 33 European exchanges, some sort of consolidation has already begun to a certain degree with Euronext and Nasdaq owning seven European exchanges each. In 2000, there were 31 countries operating 31 exchanges. Today, the number of exchange groups in Europe has halved to just 16, although the number of stock exchanges that they operate has stayed the same. The big challenge therefore remains, whereby despite the merge of exchange operating companies is taking place, the actual markets that they operate have remained separated. With just a combined €46 billion market cap between the 9 smallest European stock exchanges, increased consolidation seems to be the natural path to take to accommodate future growth.
A 2021 study by Wright and Hamre highlights that essentially on all metrics European markets are punching below their weight on the global stage. Europe’s share of the global stock markets and IPO activity is significantly lower than their share of GDP. To add insult to injury, many European stock markets are experiencing a decline in the number of listed companies. Overall, the number of listed companies in Europe has fallen by 17% throughout the past decade (delisting of nearly 1,300 companies), while the US has seen a 4% increase. Smaller exchanges have been the worst hit in Europe with around 34% less listed companies since 2009, with lower efficiency, less volume and a higher cost of capital appearing as the main drivers.
With significant obstacles in the way of the MSE in attracting foreign listings, perhaps joint venturing with other European exchanges may be a worthwhile consideration. While there is plenty of scope in the short-term to continue helping local Maltese companies go public as well as spark an interest among foreign issuers to list on the MSE, a longer-term vision ought to be in the direction of increased collaboration with other stock exchanges