New director looking to breathe life into stock exchange

Tõnis Oja
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Photo: Eero Vabamägi

Head of Nasdaq Tallinn since early August, Kaarel Ots, tells Postimees that stock market activity is in correlation with economic growth. A lively exchange means that entrepreneurs are optimistic, make investments, and have the money.

We will celebrate the passing of ten years from the peak of the Estonian stock exchange index in six months' time. US, and even crisis-ridden European markets have broken several records since then. Even though our index OMXT is pretty close to the record right now, the exchange has not exceeded the pre-crisis level as of yet. Why is that?

There is no one answer to that question. It is the result of structural problems. On the one hand we can say that it is a cyclic problem, while on the other we've lost international institutional investors (investment funds, pension funds – ed) that haven't returned.

We could claim there is a single answer, but there isn't. We need international investors to return, new issuers that would lead to increased activity of transactions and turnover.

What to do to secure the return of international investors?

I believe there are four factors that do not only concern stock market development but economic development in general. Social, economic, political, and technological factors.

I believe that as far as the stock exchange is concerned we have very good technical capacity. No one has anything critical to say about the online environment. Social factors are those among which I would place investors, whether they have money to invest, and whether they have companies in which to place that money. And then we're left with economic and political factors.

Thinking about what could be done on the political level to boost stock market activity – and this is a worn-out tale – corresponding steps would concern listing of holdings in state companies and the issue of treasury bills.

Investors would benefit from the relatively low-risk listing of state-owned companies (whether Port of Tallinn, Eesti Energia or any other state company for that matter). I believe it would be attractive not only for foreign companies but also local players.

You've said that it is your priority to lure state companies to the stock market. How do you plan to achieve that? It seems to me that it was also the goal of your predecessors Andrus Alber and Rauno Klettenberg, unfortunately with little success. What do you plan to do differently?

I cannot comment on what they've done wrong.

My question was what would you do differently?

I see a multifaceted role for the stock exchange. On the one hand it is a market. Markets are for trading. Active trading is needed before companies have reason to participate. The director of the market cannot bring new traders. The market can provide an environment, and I believe it is a good one.

I would bounce that question back. It is not something a single company or a single person can achieve. It is a greater issue, an issue that requires a social contract, if you will.

Looking at Iceland, they have fewer people but bigger stock market turnover, more companies. There are a lot of such examples of successful small countries.

Coming back to the original question, we cannot advise people on price formation and capital structure. However, we can be more visible, and if we leave aside the role of the market and environment, I also see the stock exchange as an adviser.

Looking at the big picture, all the latest studies I've read point to a correlation between economic development and the situation of the stock market. Can we be satisfied with the growth we have today? I believe we all agree it could be a lot bigger.

The situation makes perfect sense looking at stock market correlation. A lively stock exchange means optimistic entrepreneurs who invest because they have the necessary funds. It is a snowball effect, investors develop freedom of choice. I believe activity on the Tallinn stock exchange is very good. Investors have become quite a bit more active lately.

That said, the exchange cannot grow based on retail investors alone; what we need is volume. That volume could be provided by state companies.

It is very important that our companies are not just there for the stock exchange. To think about how much money individuals have just lying on their bank accounts. I'm entirely convinced that some of them want to participate in their country's ventures. Today they have no such possibility.

We can take the comparison of pension funds: less than 10 percent of pension fund assets are invested in Estonian enterprise. Funds say they have nothing in which to invest.

You said that the activity of retail investors has grown as of late. Does that increase concern the number of traders?

Their numbers have been growing steadily for the past few years. I'm convinced these are knowledgeable investors with whom we're working hard. There can never be too much financial literacy.

One of my plans is to explain our message and services in a very simple form. I've met with a lot of people whom I've asked what they think about the stock exchange. People who are not in the game, who are not active investors usually have a poor overview of instruments.

Publications have covered studies concerning the familiarity (among entrepreneurs) with alternative means of financing. It is poor. Borrowing is always people's first idea. The stock exchange grew out of the need to involve financing. I believe that is still the number one argument for entrepreneurs. Next you have transparency, reputation (primarily in terms of export markets).

Thinking about state companies, I would alter this hierarchy of relevance. I would not put involvement of capital first. I would prioritize transparency that should result in more effective management.

What you're saying is nothing new. Financial circles have been saying the same exact thing for the past 10-15 years at least. Yet nothing has changed. The message has not reached heads of companies, chief financial officers, politicians, maybe also the general public.

I would not say the information has not reached them. I believe it has reached all those groups loud and clear. I believe executives and owners of major companies know full well the possibilities offered by the stock exchange.

Why are they holding off?

There are several reasons. I said before that economic growth and the stock market move in the same general direction. Let us look for example at the reasons for involving capital – expansion or conquering of new markets.

The small and medium business sector is our priority with which we are working the hardest at the moment. That work does not concern the main list but rather the alternative market.

We currently have two companies on the alternative market. I was in Copenhagen last week for the Nasdaq Nordic strategy day. Sweden's alternative market First North sees 60 new companies a year. Of these roughly 10 percent later move on to the main market. Nasdaq Nordic's alternative market is bigger than London's AIM.

When will we see the next IPO?

Sooner or later. (Laughs.)

So will it be sooner or later?

Rather it will be sooner.

How many listed companies will we have in five years?

Rather more than fewer. (Laughs again.)

Of course I could say I see more companies in five years; however, the question is what kind of companies. I would like it if the stock market's total value would make up more than 10 percent of GDP, as it does today. That pension funds would invest more in listed companies. That they would have where to invest, and that trading would be more active.

I do not think it is important how many companies we'll have. It is important that awareness improves every year – both among investors and companies.

Let us take state companies. I see no objective reason why they couldn't list their minority holdings. Every country has its own examples, we can discuss perceivable dangers, trouble spots, corresponding solutions.

Then we have companies that would qualify for the main list. I believe we have worked on highlighting their possibilities for years, and we will continue that work.

The third group is SMEs.

Which group do you view most optimistically?

How do we measure optimism? Shall we count individual companies or volume? In terms of the latter, it would be state companies as they are the biggest. Talking about positive examples, it is the small and medium business sector. 

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