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Positive returns began to translate into further investment and by the start of 2013, outflows from Developed European Equity funds reversed and we saw €7.46 billion of inflows versus just €2.17 billion for Emerging Europe.
Just when it was looking as if a new dawn was rising on for European equities, concerns over the ability of the politicians to address the eurozone crisis were replaced by greater concerns that increasing regulation will stifle any growth or innovation As MiFID II nudges towards implementation, and participants readjust service expectations after prolonged austerity measures, the severity of the proposed new European Financial Transaction Tax will have a direct correlation to volumes and market participant concentration, potentially accentuating a further dramatic restructuring of European liquidity.
French equity turnover declined 26 per cent in 2012. Prior to the introduction of the tax, French turnover as a percentage of European turnover increased from 13.84 per cent in 2008 to 17.3 per cent in 2011. Post-August, the French market share of European trading was diluted to its lowest level since 2008, reaching just 11.88 per cent by January 2013. In contrast, the UK increased its market share to 21 per cent. Germany’s overall share of European market volumes declined slightly, from 20 per cent to a current market share of 19 per cent, indicating a further drag on overall European volumes.
The addition of the Italian Financial Transaction Tax, currently scheduled for March 1, will have a far greater effect on overall European volumes in 2013. While only accounting for a 6 per cent of European market share, the cumulative effect of the combined two tax regimes plus the extensive reach of the Italian regulation will cripple model-driven strategies, impacting the recent return to volumes. Add in worsening economic environment and the addition of a further nine countries looking to implement the Financial Transaction Tax by January 2014 and the prognosis for European equity trading looks bleak indeed. Market participants will need to address continuing challenges in both execution and investment.
Execution has already been fundamentally redefined due to depleted margins, bank deleveraging, and increased regulation – reducing the ability of market participants to interact. With implicit market costs more important than explicit costs, flexibility to access liquidity wherever it is available is reshaping the traditional linkage between portfolio management and execution.
During 2012, model-driven funds continued to dominate broker order flow at the expense of the stock-picker. In 2013, the return of the fundamental investor will offer a valuable glimmer of hope for brokers to address the commission slide of 2012. Squeezed volumes have put pressure on a sell side seeking to operate a sustainable business model with sub-15bps secondary market commissions and an evaporated primary business. However, if regulation targets model-driven trading, any upturn in commissions will be muted and will be too little, too late for some. Further consolidation amongst the European brokerages is inevitable.
Summary (link to full report for TABB subscribers)