Berlin’s divisive wall fell a quarter of a century ago, ushering in the promise of private ownership, notably the freedom to buy and sell shares in privatised firms once in the state’s throttling grip.
Yet, surprisingly, it’s taken that amount of time for a group of stock exchanges to emerge with sufficient power, focus, ambition and influence convincingly to be called regional leaders. Each is wildly different from the next in terms of scale, size, liquidity, geography, reach and diversity. Each trumpets its independence (though two are considering a merger of sorts). And, of course, as is the way with proud national level institutions, each thinks it’s better than the rest.
Stock exchange number one is the Warsaw Stock Exchange (WSE). Many in the early 1990s tipped Budapest or Prague to emerge as the leading securities trading hub in central and eastern Europe. Neither did: combined Prague-Budapest turnover in the first quarter of 2014 was €7.1bn, less than a third of the WSE’s turnover.
Instead it was Warsaw that emerged from the post-Soviet gloom with its head held highest. Poland systematically and aggressively instituted a reformist agenda, deregulating entire industries — energy, banking, telecoms, power production and transmission — and listing new corporate entities on the WSE. It created, notes WSE chief executive officer Adam Maciejewski, “a huge and very dependable flow of institutional demand for equities”, while also sucking in a regular flow of domestic and regional initial public offerings.
Warsaw’s influence has spread far and wide. Bucharest’s stock exchange, the BVB, run by a former WSE chief executive, is very publicly attempting to replicate its successful structure in southeastern Europe. The Romanian state plans to list a raft of power sector firms on the BVB in the second half of the year. Nor has the WSE stood still. It’s by far the largest CEE-headquartered stock exchange, generating around 60% of all equity trading across the region, while leading in bond trading and derivatives. Maciejewski wants it “to continue to play a significant role in bringing the entire capital market in the region closer together and integrating it further with the wider European market”.
Maciejewski’s ‘WSE.2020’ plan goes a step further. It remains superficially rather more vague than “brave”, to use the CEO’s adjective of choice, espousing further development of “existing business lines” (convincing domestic and wider regional corporates to list in the Polish capital). The plan, when completed, will turn the WSE into “a flexible, well diversified and internationally oriented modern enterprise supported with state of the art trading technology”, the WSE chief adds.
WARSAW AND VIENNA: THE MATCH-UP
But look closer and the longer term plan becomes clearer. The WSE harbours ambitions of inking some form of joint venture with the Wiener Börse: the two exchanges held preliminary talks in November 2013 in Vienna; in January, Maciejewski expressed his wish that a merger be “realised this year, in the form of a share issue”. A Wiener Börse official admits that talks were ongoing and that a joining of forces would benefit both. Warsaw, with a market capitalisation of $204bn at the end of 2013, against Vienna’s $117bn, is both larger and, with 895 listed corporates versus 102 in Vienna, more diverse.
But the Austrian capital is hardly an also-ran. As stock exchange number two in this trio of regional power brokers, it dominates an umbrella grouping, Central and Eastern Europe Stock Exchange Group (CEESEG), which both oversees and owns majority or outright stakes in the bourses of Prague, Budapest and Ljubljana. CEESEG offers global institutional investors, increasingly drawn to a region offering low indebtedness and a revived growth story, a genuine wealth of investable securities listed in many of the region’s most influential economic hubs. Around 70% of the capital funnelled through CEESEG originates in major financial centres, notably Frankfurt and London, while one quarter of all CEESEG institutional members are American.
Both exchanges, then, retain tangible and desirable strengths lacking in the other. Warsaw offers greater depth and liquidity contained in a single bourse; Vienna in turn provides diversity, regional scale, and mature and sophisticated trading links to the global investor community.
ADVANTAGE VIENNA?
Yet reaching an accord acceptable to both may not be easy. Warsaw is far the more eager suitor, visibly harrying Wiener Börse for a decision. There’s a widely held view across the region that Warsaw is losing its lustre, and that the momentum is swinging back toward Vienna, the dominant regional securities player in the 1990s. London-based financial consultancy Z/Yen placed Vienna 19th in terms of the world’s most influential stock exchanges at the end of March 2014, up a single place over the previous six months. Warsaw by contrast dropped 11 places over the same period, to 60th place.
Poland’s decision to regain control of more than $50bn worth of privately run pension funds, placing them under the auspices of the state, has enabled the government to trim its debt burden. But it also makes it harder for corporates eyeing a listing opportunity to find buyers. Warsaw continues to process initial public offerings — 10 were completed in the first quarter of 2014 alone. But they are becoming increasingly small. The average size in the first three months was just €1.8m.
Michael Buhl, co-chief executive officer of both the Wiener Börse and CEESEG, acknowledges Warsaw’s “impressive” ability to process “a large number of IPOs”. But he contrasts the latter’s recent plethora of tiny stock offering to Vienna’s sole first quarter trade, a €2.8bn capital increase from Raiffeisen Bank International. “The volumes of more international markets [like Vienna] are very different” to the likes of Warsaw, which remains “a very national and also a very closed market”. Warsaw has passed on chances in the past to buy or take stakes in several regional exchanges, including Bucharest, decisions it may now rue.
The sense is that Warsaw is aware of its precarious position, while Vienna, which at the height of the financial crisis may have jumped at a deal, is now content to keep its options open. A Wiener Börse executive says that a merger of some description would “strengthen” the position of both Vienna and CEESEG, adding the caveat that the group was “already well positioned”.
For his part, Maciejewski admits that a deal with someone, preferably CEESEG, is fundamental to the WSE’s future. “I do not think national exchanges operating in relatively small markets will survive in solitude,” he says. “We already see a lot of M&A activity or some other form of co-operation among exchanges.” The one no-no, Maciejewski insists, would be a tie-up that emphasised the pre-eminence of Vienna. “I would exclude any form of absorption of WSE by CEESEG.”
MOSCOW: SCALE AND POTENTIAL
Finally, there is stock exchange number three, another relative outlier — like the Wiener Börse, it sits outside the CEE region. Yet what the Moscow Exchange lacks in terms of regional relevance — it has sucked in very few IPOs from around the region since the fall of Communism — it more than makes up for in terms of scale and potential.
The Moscow Exchange is itself a merger (which in itself presents a further strategic reason to flag up the importance of a WSE-CEESEG alliance), having been created in 2011 following the union of MICEX (Moscow Interbank Currency Exchange) and Russian Trading System. By any measure, Russia’s new flagship exchange is a whopper. Its market capitalisation at the end of 2013 was $770bn, according to company data, with total trading volume across all products rising 22% year on year in 2013, to Rb450tr ($12.6tr), and net income jumping 41% to Rb11.6bn.
Evgeny Fetisov, the bourse’s chief financial officer, sees 2014 as a transition year in which to tie up any loose post-merger ends. “We are continuing to unify our IT systems, and to get all of our markets operating under one umbrella system,” he tells Emerging Markets. “Over the next two years, we will further strengthen our post-trade services. It has been a year of focusing on infrastructure upgrades and improving investor rights.”
The key to the bourse’s future will be convincing corporates across both the CEE region and the Commonwealth of Independent States that a listing in the Russian capital is in their best interests. “We’ve been working on a strong pipeline of new issuances for some time. That’s a realistic medium term ambition given the fast growing size of our investor base,” says Fetisov.
LONDON, NEW YORK, MOSCOW...
Russia’s Crimean adventure has, for now at least, dented this ambition. “It’s obvious to everyone that recent events around the region may stall some of these listings in the short term,” Fetisov admits. Nor should officials within the WSE or CEESEG worry quite yet. ‘Regional’ to Moscow tends to mean markets within what might be termed the ‘Russosphere’ — Ukraine, Belarus and Central Asia, including Kazakhstan. Besides, it’s clear that the bourse, true to Russian pride, sees its peer group as London and New York, rather than Warsaw or Vienna.
“Given their relative lack of size and scale, the other stock exchanges in the region don’t concern me,” says Fetisov. “They are rather small — the Moscow Exchange processes 15 times the amount of equities on any given average day than Vienna. Our market cap is eight times larger. Even if Vienna merges with Warsaw, it won’t be a realistic rival. We see London and New York as our natural rivals, and we are focused on honing our message to investors — that it’s better and more efficient to trade on the Moscow Exchange than either of them.”
Three stock exchanges very different from each other, but a quarter-century on from Berlin’s night of glory, we finally have a trio of stock exchanges, each powerful and weak in its own way, vying for regional domination. It will be a rivalry worth watching.