Europe needs more retail investors: Fitch

Among other things, that report called for efforts to improve productivity with greater investment in research and development, and increasing the allocation of capital to riskier, innovative firms.

“There is no lack of ingenuity in Europe but there has been far less success in scaling up and commercializing innovation including through the use of equity and venture capital,” Fitch noted.

Alongside efforts to improve listings, and to create a more integrated capital market, one way that policymakers are trying to address this shortcoming is by unlocking household savings, it said.

Compared with the U.S., households in Europe have higher savings rates, but they hold a much larger share of these savings in bank deposits — accounting for about 30% of household financial assets, versus 15% in the U.S., it noted. 

“Banks are a more important source of credit to the private sector in Europe than in the U.S., and they are more tightly regulated and more risk-averse than capital markets investors,” it said.

At the same time, Europeans invest less in equities than their U.S. counterparts overall “at a cost to economic growth,” Fitch said.

Household wealth has also suffered from this lack of equity exposure — in Europe, household financial assets represent 220% of GDP, versus 440% in the U.S., it noted. 

However, within Europe there is some variation in these trends, it said. 

For instance, households in Nordic countries have larger equity holdings, “and these countries have larger equity market capitalization and more startups,” it said.

Encouraging a shift of household savings into capital market investment is one of the core objectives of the European Commission’s new plan to secure its economic future, Fitch concluded.