Today, we explore a growing trend and a potential solution for the development of Central European capital markets – the integration of regional stock exchanges.

Two weeks ago, Bratislava hosted representatives from seven Central European stock exchanges and the European Bank for Reconstruction and Development. With the aim of fostering cooperation in identifying and implementing key initiatives to strengthen the development of regional markets, members of Bratislava, Budapest, Bucharest, Ljubljana, Sofia, Warsaw, and Zagreb, along with the EBRD, signed a Memorandum of Understanding.

The idea behind the Memorandum lies in the potential benefits of pooling resources and expertise to position CE as an attractive region for capital investment and innovation financing.

The key objectives of the MoU include:

• Development of primary markets: Facilitating access to capital for CE companies, especially in the early stages of business development and expansion. This is particularly important for SMEs, which often have limited options to raise capital.
• Operational integration of market infrastructure: Streamlining cross-border processes and enhancing the connection between exchanges to create a more integrated and user-friendly environment for investors and issuers. This enables a more efficient flow of capital, making CE capital markets more attractive.
• Activation of retail investors: Encouraging long-term investment, improving market liquidity, and reducing barriers to investment on regional exchanges.

Efficient and flexible capital markets are vital in supporting SMEs, particularly in the high-tech and service industries, which play a significant role in driving economic growth. However, regional integration should not only benefit SMEs; it can also enhance visibility for well-established companies. Also, this integration would enable households to participate more significantly in the region’s economic success, free from the limitations of market fragmentation. Furthermore, by combining the best-performing stocks from regional markets, the entire region could benefit from attaining emerging market status, further opening towards foreign investors, and solving the persistent challenge in some CE capital markets – illiquidity. Below we present the MSCI market classification framework.

MSCI Market Classification Framework

Source: MSCI, InterCapital Research

Notable examples of capital market regional integration include Euronext, a prime example of successful regional market collaboration, as well as Nasdaq Nordic and Nasdaq Baltic. However, past experience demonstrates that integration is effective only when built on strong local ecosystems and close cooperation between regional markets. Additionally, as evidenced by the Baltic region’s integration, this process can take some time.

Moving on to challenges that should be addressed. The obvious one is technical infrastructure, as each market currently operates with its own clearing house and other individual capital market components. Thus, regulatory simplification and harmonization are essential and should be the first step toward broader integration. Also, a challenge with CE regional integration is Poland’s dominance in market size, as seen in the graph below, which could overshadow smaller markets like Bulgaria, Croatia, Slovakia, and Slovenia, leaving many of their companies behind. It is worth noting that Slovakia was excluded from the analysis due to significantly lower equity market capitalization compared to other countries.

Regional equity market capitalization (Q3 2024, EURbn)

Source: Bloomberg, InterCapital Research

To conclude, integrating regional stock exchanges offers numerous benefits, but these cannot be fully realized unless local capital markets improve in key areas such as turnover, liquidity, the number of IPOs, etc. For instance, state-owned enterprises could be instrumental in driving the growth and development of local capital markets while unlocking their own full potential, as evidenced in the Romanian market. Nevertheless, the Memorandum of Understanding stands as a commendable initiative, serving as both a catalyst and a source of motivation for each individual capital market.