Why Innovation in European Capital Markets Lags Behind the United States
In autumn 2020, the Money Maze Podcast welcomed Sir Xavier Rolet onto the show for an insightful episode. Sir Xavier introduced the European debate of debt versus equity, explaining the economic models of the largest European countries, stressing the recalibration needed. With each country having its own investment, production, and consumption patterns, the current European fiscal and monetary policies are biased towards debt and damaging to equities.
Mr. Rolet underlines two key areas for thought throughout the podcast: innovation and wealth creation through equities. Innovation and equities are tightly interlinked; innovation boosts equities, while equity finance drives innovation.
As we know, equities are highly responsive to macroeconomic, geopolitical, and psychological environments. For instance, on 26 April, Wall Street stocks had an immediate reaction to Joe Biden’s tax increase announcement.
Mr. Rolet discussed how European firms underutilise capital markets for growth and expansion, talking about the changing culture of participation occurring in Europe, including whether people are afraid of risk, and how to approach risk within the corporate culture. Therefore, he argued Europe can scale up innovation significantly through economic reforms.
Europe, however, is leading in sustainable investment. For instance, 10%+ of ETF assets in Europe are ESG, and as of 26 April, the inflows into sustainable ETFs exceeded inflows into other ETFs in Europe for the first time. While there are certain data-related and greenwashing challenges with ESG strategies, the pace of innovation, and its conversion into value remain much higher in the US. The US, specifically Silicon Valley, has a special culture of ownership and risk-taking.
Undeniably, Europe and the US vary in sectoral composition, especially as Europe lacks growth and tech stocks, hosting more cyclical and mature companies. US stocks are weighted highly towards technology, enjoying huge growth in sales and prices in 2020, causing the markets to boom.
Perhaps, it is good that European growth is relatively diversified. As the vaccine rollout accelerates and economies recover, European companies should bounce back and enjoy better results over the next few months. Reflation in 2021 could provide a boost to Europe’s cyclical value stocks, and now some investors are starting to overweight Europe with the expectations of its outperformance in the near future.
Innovation will allow better customer-centricity and customization in markets with numerous choices and substitutes, creating value and cutting costs using quantum computing and communications. Mr. Rolet underlined that it is essential for young professionals today to question the future of innovation and receive mentorship from those who recognize its importance.
Xavier Rolet learned his own value creation lessons in his time at the LSEG, as he focused on the clients and operations management. The podcast discusses Mr. Rolet’s strategy when LSEG did a range of acquisitions, transforming the company in an exceptional manner. The share price growth of the LSE with Rolet as Chief Executive rose at a compounded rate of 25% per annum.
By Liza Bayankina. Liza is a Management student at the London School of Economics and a Money Maze Podcast Brand Ambassador. As a Co-Head of Online Learning Hub at Women Societies Alliance, she conducted interviews and online panels with female professionals working in finance. In her spare time, she enjoys dance lessons and running.
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