The changing face of markets
Monday, 01 Feb 2021
Cees Vermaas, CEO at The International Stock Exchange Group, explores how the COVID-19 global pandemic and Brexit are changing capital markets as we have known them.
I see myself as a ‘global’ citizen that, through my work over the last 20+ years, has developed a deep experience of capital markets and exchanges. At the beginning of this century I was part of the creation of Euronext that resulted a few years later in leading its European cash market from Paris before I became CEO of Euronext Amsterdam, the globe’s oldest stock exchange.
I have also worked for US exchanges such as CME Group, for which I have been leading CME Group’s European derivatives exchange from London. My most recent move was late last year to Guernsey, in the Channel Islands, to lead The International Stock Exchange (TISE).
My move to Guernsey came at a time when the coronavirus (COVID-19) global pandemic was imposing unprecedented change upon our lives, including socially and economically.
One consequence is that there has been a huge slowdown in IPOs and instead companies tapped the equity and debt markets for fresh capital to sustain their businesses. While many sectors such as travel, retail and hospitality have been simply trying to survive the current crisis, others like life sciences and digital have been seeking investment for the future.
2020 has been TISE’s second-best year for new listings in debt-securities since its establishment in 1998. With a total of 831 new listings, we saw a 27% rise year on year as, aside from anything else, companies looked to restructure and refinance, either out of necessity or opportunity.
For example, issuers of high yield bonds listing on TISE last year included luxury car manufacturer Aston Martin, LEGOLAND owners Merlin Entertainments and transport operator Stena, as well as US digital content platform Netflix and European telecommunication companies Altice and eircom. Listings also included three of the largest 10 European high yield transactions in the third quarter of the year, with the largest being the Liberty Global and Telefónica financing vehicle for the merger of Virgin Media and O2.
Some of these high yield bonds have been issued by companies owned by private equity groups. We have also seen continued growth in private equity houses issuing listed loan notes to finance their acquisition of portfolio companies. This activity has not slowed and there still seems to be significant ‘dry powder’ which is waiting to be deployed, as well as new capital being raised.
I may be too early to draw conclusions, but the British private equity sector does not appear to be particularly suppressed by Brexit. Similarly, while the UK real estate sector has been adversely impacted by the pandemic and the effects of Brexit may be yet undefined, TISE saw continued growth in debt and equity listings last year which were financing property transactions. Our Exchange is now home to more than a third of all UK Real Estate Investment Trusts (REITs) and the eight new structures last year have been followed by a flurry of new applications at the start of this year.
So, we haven’t necessarily seen adverse impact from Brexit on the UK as a place in which to invest but we saw some impact on supporting UK exchanges and markets infrastructure.
Yes, the UK and the EU reached a deal for Brexit on 31 December 2020 but that did not cover in any real detail the financial services industry. This has been pushed down the road to be sorted out in the period to come and therefore, in the meantime, it means that there is no equivalence between the UK and the EU.
The fallout from this is significant in several ways. One high profile example is the split in the trading of blue chips. Share dealing in euro-denominated equities which would have been previously traded in the UK has shifted from London to the operators’ newly established EU venues, whether in Paris or Amsterdam.
An abrupt no deal for financial services means that right now the UK is actually in a worse position in many ways compared to other ‘third countries’ who have always been outside the EU. These jurisdictions, who have mutually accepted positions and, where relevant, agreements with the EU and its Member States, offer certainty compared to a UK where there remains uncertainty around the regulatory environment going forward.
As TISE is headquartered in Guernsey, we offer a venue which is in Europe but that is outside of both UK and EU and as such, it means that we are able to continue to provide a stable and proportionate regulatory environment for listing a wide range of equity and debt securities. With our team operating across not just the Crown Dependencies of Guernsey, the Isle of Man and Jersey but also in Dublin and London we remain strongly positioned in a post-Brexit environment.
The future of markets
Brexit has brought about some profound changes to liquidity pools already, but the longer-term consequences remain unclear. Of course, this has occurred in midst of a global pandemic when policy makers are responding with both fiscal support to the real economy and monetary policy aimed at providing a stimulus through the markets.
The latter has seen a continuation of quantitative easing (QE) which was originally the response to the financial crisis of 2008. As a systemic failure of the markets, QE was the right response at that time, but the developed economies never managed to ‘wean’ themselves completely off it prior to pandemic, which is a health and social crisis.
The result is that markets have been able to bounce back from the initial shock to the system and are in a relatively strong position given the circumstances. That’s what it looks like on the surface but hidden from plain sight are the growing mountains of national debt which are becoming increasingly incomprehensible and arguably, also unsustainable.
The question is where we are heading next and whether we will continue with the traditional model or if we see acceleration in developments in digital, via distributed ledger technology and digital currencies and assets, will herald a more fundamental shift in the way we operate as trading blocs, sovereign states, commercial enterprises and as individuals.
I leave you with that question to ponder for the future but in the meantime, most important, I hope you stay safe and well during these difficult times.
This article was published on City AM, 1 February 2021