The European Commission (EC) is looking at the development of an equity index covering all listed companies in the EU, with the aim of creating a ‘Capital Markets Union (CMU) asset class’.
The goal is to facilitate increased investment in a large pool of companies, including small and medium-sized enterprises (SMEs), in particular in the Baltics and in central, eastern and southeastern Europe.
These represent the majority of companies listed in the EU in recent years, but typically have not been included in EU-wide equity indices calculated by international index providers, notes the EC in a feasibility study for the creation of a CMU equity index.
An ongoing study – the Feasibility Study for the Creation of a CMU Equity Market Index Family – is looking to develop the framework for a CMU Index and assess its market potential.
In recent years institutional investors have shifted their attention to larger and more liquid listed companies, to the detriment of smaller listed companies and markets, the EC notes. Another issue has been the categorizing of particular EU countries as ‘frontier markets’, preventing institutional investors from being able to allocate to them. These include Bulgaria, Croatia, Estonia, Lithuania, Romania, Serbia and Slovenia.
Estonia, Lithuania, Romania and Slovenia are included in the MSCI Frontier Markets Index, while Bulgaria is a stand-alone market index, but based on MSCI’s size and liquidity criteria for frontier markets.
‘The creation of an EU-wide CMU Index could facilitate greater local and foreign capital inflows from a broad range of investors and enhance access to finance for a larger pool of companies, especially SMEs,’ says the EC. ‘SMEs in all countries and more generally in small capital markets could benefit from such [a] broadly defined and inclusive index.’
The emergence of a ‘CMU asset class’ could also help overcome different country classifications at EU member-state level, the EC adds, citing the Wilshire 5000 Total Market Index in the US as an example of what the CMU Index could develop into. The Wilshire 5000 is a market cap-weighted index of all stocks actively traded in the US.
The market assessment is to be based on ‘extensive market research and surveys among relevant institutional investors [that] should also be tested for the acceptance of the newly designed index,’ the EC notes. ‘The analysis should pay special attention to asset manager institutions [that] act as opinion leaders for end institutional investors.’
The index will comprise companies listed on regulated markets and SMEs listed on growth markets, with sector or thematic sub-indices covering ‘strategically important areas’, such as fintech or sustainability.