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Factors Impacting Capital Formation in Emerging Markets: A Vicious Circle Analysis

This roundtable discusses the challenges of capital formation in emerging markets, highlighting low market capitalization and trade velocity. Domestic investors often seek global liquidity while international investors face limited access. Major issues like ownership structures, the dominance of state-owned companies, and the reliance on bank financing hinder market development. The low supply of quality stocks, weak corporate governance, and insufficient engagement from local and international institutional investors contribute to a vicious cycle. Understanding these factors is crucial for fostering more robust capital markets.

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Factors Impacting Capital Formation in Emerging Markets: A Vicious Circle Analysis

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  1. Capital Formation Roundtable Factors influencing Capital Formation in Emerging Markets Hannes A. Takacs Orlando, 27th March 2012 www.capmex.com

  2. Current Status: Vicious Circle • Low market capitalization as well as trade velocity • Domestic investors seek global liquidity • Limited access of international investors • Going public of domestic companies on international exchanges • Capital markets infrastructure still in development Marginalized capital market – a vicious circle

  3. Potential Reasons for Underdevelopment • Ownership structure of listed companies • Few majority owners • Small free float • Specifics of companies • Attractive large non-listed companies are state-owned • Mainly small/medium sized • Not listed / no intention to list • Rely on bank financing • Prefer to list abroad • Lack of attractive stocks • Few top performers • Corporate Governance • Partly weak fundamentals • Low shareholder value • orientation of companies • Lack of growth segment Low quality of supply Low quantity of supply • Venture capital market / private equity • Underdeveloped Low liquidity Under per- formance Little investor interest • Pension/Insurance system • Lack of private pension • schemes • Missing capital market orientation Low demand of investors Low demand of retail investors • Domestic Institutional Investors • Pension Funds dominate • Insufficient activity of other local institutional investors • International Institutional Investors • Lack of demand based on low weighting • of home country´s equity market in • international portfolios • Attractive home market stocks listed and • traded abroad • Private Stock Ownership • Low level of private stock ownership • Lack of awareness/education • Lack of strategic allocation during IPO • Invest outside of home country

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