Proposals to break down the barriers between Europe’s capital markets could be a boon to the asset management sector, says Moody’s Investors Service.
In a new report, the rating agency said that a set of recommendations — published last week by an expert panel advising the European Commission — calling for increased capital market integration is a positive for asset managers.
The recommendations, which are designed to help catalyze the region’s recovery from the effects of Covid-19, include proposals for cross-border licences for financial advisors, tax incentives, pension reforms, harmonized corporate insolvency laws and enhanced investor education.
While policymakers have yet to formally adopt the proposals, Moody’s said that the recommendations “demonstrate growing momentum” behind efforts to dismantle barriers to cross-border saving and investment.
In Europe, fragmented markets mean companies are less able to use capital markets for financing, and are more dependent on bank lending, the report noted.
For instance, Moody’s reported that listed equities equal 68% of GDP in Europe, compared with 170% in the U.S., and debt securities equal 85% of GDP, compared with 100% in the U.S.
“Private-equity and venture capital investments in the EU are also smaller than in the U.S.,” Moody’s said.
“This is partly because burdensome legal requirements reflecting the fragmentation of investment markets along national lines have held back the take-up of European long-term investment funds.”
Additionally, approximately 70% of assets under management (AUM) in the region are in investment funds that are distributed only in their domestic market due to obstacles to cross-border fund distribution.
The expert group’s recommendations “broadly aim to facilitate capital market and private-equity financing, encourage cross-border investment and improve the sophistication of retail investors through better financial education,” Moody’s noted.
“Although there is no guarantee that the recommendations will take effect in their current form, they are evidence that the coronavirus crisis has reinforced efforts to integrate European capital markets more closely,” Moody’s said.
This, in turn, is positive for asset managers, who have been impeded by the region’s fragmented capital markets, the rating agency said.
Fragmented markets have hampered firms’ ability to achieve scale, “which has held back their investment in new products and technology and hindered their profitability,” Moody’s said.
The recommendations, if adopted by the EC, would also require the approval of the European Parliament and European Council before taking effect.