International stock exchanges have become reliant on initial public offerings by emerging market companies to boost their listing revenues.
In the past four weeks, international flotations on the London Stock Exchange have raised $4.2 billion (€2.7 billion). This month, there have been new issues from Russia, the Czech Republic, Egypt, Mexico and Pakistan.
However, if issuers and advisers do not take their responsibility for secondary market trading seriously, the exchanges will not be able to convert their listing success into trading revenues. In addition, issuers may end up finding it is more difficult to raise more capital if they want to come back to the market.
Analysis of the average weekly turnover in the shares of companies from Brazil, Russia, India and China on the New York Stock Exchange and the London Stock Exchange shows there are a large number of stocks that are lying dormant.
Since the start of 2006, there were only nine Bric stocks with an average weekly turnover of more than 3% – the average weekly trading volume in relation to the number of shares issued that listed-on NYSE Euronext or the LSE.
The two stocks with by far the highest turnover were NYSE-listed solar energy companies.
The average weekly turnover of shares in LDK Solar, which makes multi-crystalline wafers for solar cells, and Yingli Green Energy Holding Company, which makes photo-voltaic products, was, in both cases, 15%.
Investor enthusiasm for the sector also extended in part to Jetion Holdings, which makes solar cells and listed on the LSE’s alternative investment market. It had a 5% average weekly turnover this year, by far the highest rate among the Chinese companies that floated on the London market last year.
The lack of share turnover was particularly pronounced on Aim, which has attracted a large number of smaller companies at an early stage of development. Average weekly turnover this year was 0.5% for the 19 Chinese companies that listed on the exchange last year.
It is not just small companies that can suffer from a lack of liquidity. It is partly a question of the issuer’s mindset. Mark Jarvis, a partner at Ernst & Young in London, said that for issuers from Russia, Kazakhstan and Ukraine, the secondary market in their shares was not a priority when they were planning an international listing.
Their main priorities are raising money and getting an international reputation. Only after that do they think about developing their share base, even though this becomes more important as markets develop, he said.
For example, a number of Ukrainian companies have started to consider overseas listings in Warsaw. The reason is that there is demand for IPOs in Poland due to the high investment in equities by domestic pension funds. Companies can achieve high valuations but secondary trading is low and there are clearly better exchanges to raise an international profile.
London has many attractions for emerging market companies, particularly those from the metals and mining sectors due to the depth of coverage of the sector by the sellside and buyside.