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Monday, January 20, 2014 8:33:22 AM

Bright outlook for European equities but regulatory hurdles ahead

After a successful 2013, Europe’s equity markets are set to continue to perform steadily, buoyed by US growth, but key market structure reforms could threaten growth beyond 2014.

What is expected of European equity markets in 2014?

Overall, 2013 marked a recovery in trading volumes that is poised to continue into the start of 2013. Last year, the FTSE 100 experienced strong performance alongside the Dow Jones Industrial Average and S&P 500. In France, the CAC 40 reached its highest levels since September 2008 during 2013 and the DAX index reached an all-time high in December.

Even Spain, which has grappled with currency concerns during the eurozone crisis, managed a recovery, in part linked to the lifting of a ban on short selling earlier in the year.

In total, value traded on European exchanges reached €8.46 trillion in 2013, up 5.1% compared to 2012, according to figures from Thomson Reuters Equity Market Share Reporter, while the amount of dark trading on multilateral trading facilities (MTFs) also showed impressive growth, jumping 40% in volume traded compared to 2012.

These overwhelmingly positive volume trends place Europe’s equity markets in a strong position for continued growth this year.

Will MiFID II or other regulatory issues affect growth?

Despite significantly regulatory progress in recent years, it's unlikely regulatory change will impact the equity market this year. After years of political wrangling, an agreement on reforms to 2007’s initial Markets in Financial Instruments Directive rulebook was reached last week. As a result, there are a number of key market structure questions facing the industry and the application of the rules, by the European Securities and Markets Authority, will pose a major challenge. 

In particular, rules affecting dark pools will eventually see – as intended – a slight reduction in the amount of off-exchange activity compared to years previous. But in the meantime, dark trading in Europe is going from strength to strength, making up 11% of equity market activity across MTFs and broker crossing networks, a trend expected to continue this year

The slow pace of implementation means many of these reforms will not actually be in place until 2016 at the earliest.

Will a financial transaction tax (FTT) further limit growth?

Progress on a possible Europe-wide FTT has occurred slowly, but may still occur. In September a leaked document suggested an FTT would breach European treaties, rendering it illegal, while concerns of the impact of the tax on the equities market and in particular liquidity have continued.

France and Italy, which have both implemented transaction taxes have seen liquidity in equity markets dry up, especially when the taxes were initially introduced. Germany has sat on the fence somewhat over the idea, but introducing a tax on financial trades was one of the key policies that Angela Merkel was forced to offer her Social Democratic Party coalition parties in order to form a government after elections last year.

More recently, the European commissioner for tax affairs, Algirdas Semeta, urged member states to take a hard position on the FTT and not dilute their initial proposals. He also said that he believes an agreement in the first half of 2014 is possible, raising the spectre of an FTT being introduced in the latter half of the year.

Richard Henderson +1 212 217 6916 richard.henderson@information-partners.com