Do you remember when Archduke Ferdinand was assassinated? Or when the Spanish flu paralyzed the American populace? Then you might recall the last time European equity markets outsized Wall Street. That is, until last week.
Thomson Datastream, a sprawling database of financial metrics, delivered the digits over the weekend: 24 stock markets in Europe added up to a market capitalization 80 million US dollars higher than that of the total American stock market.
However, as the name Datastream suggests, the metrics that Thomson spews out are something of an unfiltered numerical hemorrhage.
Though financial news networks and websites conveyed the story all Tuesday with unqualified and sensationalized headlines, the new data flow requires some clarification both in the geographical picture it reflects and also in terms of the political economies involved.
Though I am all for the development of regions other than the United States and their ultimate ability to host domestic and foreign money that can freely move from opportunity to opportunity, the putative new European primacy is owed largely to an old European model.
Investing in Investibility
Prune-faced nobles cling to their hereditary shares in European companies, which are in some cases the last vestiges of family estates that predate the Industrial Revolution.
Pseudo-privatized companies rest in the hands of national leaders, who are unwilling to let a majority stake out into the free world lest it become a ward of private enterprise and lose its national flag to the transparent standard of the MNC (multinational corporation).
This is Europe.
And this is why the two primary touchstones for market cap statistics in the investment universe, MSCI and FTSE, do not log shares that are not floated in a completely tradable structure. The Financial Times, which owns FTSE along with the London Stock Exchange, reports that Europe has more companies with controlling family- and government-held stakes than the United States.
These shares are effectively on ice. Over time, due partly to pressure from a more demanding investor base and from increased international integration via the EU and WTO, some of these legacy shares have been unleashed and allowed to trade freely. This is an important step in the evolution of capital markets around the world, and one which is taking place in parallel in China nowadays.
In the meantime, though, a market cap tally that includes non-tradable shares is an empty number. Quite simply, if the international stock trader cannot buy a share, it is off his or her menu. Though you may salivate over the would-be offering, you might as well save the slobber for more readily available equities that you can actually sink your teeth into.
Exposure or Explosion?
Since the specter of Sarbanes-Oxley began to haunt US-listed companies in 2002, that burdensome regulatory law has heaped loads of extra accounting and procedural costs on foreign companies wanting access to American markets, while shaking the threat stick at would-be Enrons of our own.
At the same time, outsiders who have gotten into the domestic market were shackled by a regulation that any foreign company could not de-list its US shares if it had more than 300 US shareholders.
Obviously, if a company wanted to set up a New York ticker symbol, it would hope to attract more than a few hundred interested parties. Now, with a late-March revamp of the 300-shareholder restriction, some European and other foreign listers may decide to skip the country in a New York minute.
Per the Securities and Exchange Commission ruling on March 21, a company will be allowed to deregister from the SEC if no more than 5% of its daily global trading volume over the past year came from US trading.
The SEC figures that about 360 of the 1,200 foreign companies listed in the US will come in under that limbo bar, and commissioner Roel Campos added on the day of the ruling that about 60% of the European companies listed in the States could leave under the provision.
Though this is a springtime decision, coming just as many Americans (including myself) are getting hay fever from a record-breaking allergy season, the big sneezing and coughing fit for US markets won’t come until this summer, when the June deadline of Sarbanes-Oxley’s dreaded Section 404 rolls around.
Section 404, which makes company heads officially submit internal accounting results to a government auditor, may be the last straw for some of the aforementioned European listers.
But if they know the difference between a boring old game and a somewhat frustrating new one with a strong potential outcome, those European firms will stay in to win, while you reap the benefits of foreign access through domestic exchanges.
Regards,
Sam Hopkins
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