Perspective

How to build a stronger investor culture across Europe


Creating a culture of investing across Europe has to start with the individual. Instead of focussing only on what information fund managers and distributors need to disclose, how and when, we need a framework which starts with people’s needs and priorities. We need to recognise that people are not on the lookout for a specific product. They need solutions to real life problems and a culture of investing is about them being aware of the possibility to reach out to capital markets and invest to get these solutions. For this to happen, we must ensure that they have: financial advice they value and trust; financial literacy; meaningful information; and, a framework based on technology supporting them in their investment journey.

What is the Capital Markets Union (CMU) and why should we care?

Work to establish a single market for capital in the European Union (EU) spans half a decade, from the first action plan on building a CMU in September 2015, to the latest recommendations by a purposely set High-Level Forum in June 2020. The ultimate goal and ambition has been to complement bank-based finance with market-based finance so that companies in the EU are able to raise money from multiple and diversified sources.

The potential benefits are immense. The think-tank New Financial estimates that if the capital market in each Member State were as large relative to GDP as in the five most developed Member States, the EU could have an additional 4,000 companies by 2027, raising an extra €600bn per year in capital markets. This is roughly double the existing levels of activity and could happen through different channels, such as:

  • an extra 295 IPOs a year raising around €76bn each year;
  • an additional 280 companies raising an extra €105bn a year through corporate bonds;
  • nearly 1,900 additional companies raising an extra €2.6bn a year in venture capital.

The stakes are high but fulfilling the CMU ambition is not straightforward. The multifaceted approach, set in 2015, has combined actions relating to companies themselves and the infrastructure of capital markets. It has also captured the other end of the chain, that is, the source of the money: individual savers and their willingness to invest (directly or indirectly) in capital markets.

Europeans are reluctant to invest

The bad news for delivering the CMU is that European households have a very persistent preference for holding cash instead of investing in capital markets (Figure 1). Roughly, for the last 20 years, currency and deposits have accounted for about one third of household assets, which is almost as much as investment funds, equity and debt securities put together (Panel A). In fact, European households seem to have moved further away from securities and funds since 2001 although there has been a considerable increase in the value of pension and insurance assets. Still, currency and deposits have overtaken all the other types of financial assets in the time since the CMU was launched (Panel B).

All this is despite the value of European household assets increasing by almost 47% between 2008 and 2018 while liabilities grew at less than half that rate (Panel C).

 

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