Having a highly developed capital market and stock exchange is a precondition for any competitive, innovative economy. A well-functioning stock exchange encourages investment in bonds and shares, which is of critical importance to enterprises which are denied credit by banks, especially during a slowdown in credit. Being present on the stock exchange requires companies to operate transparently, which greatly contributes to “cleaning up” the economy. In the face of global competition, it is essential for Hungary to establish leading centres of knowledge, innovation and production. This process is supported by developing enterprises listed on the BSE in a way that is centred on Hungary, with independent management, thus enabling regional expansion with the help of capital fundraising.
The timing for formulating and implementing the new stock exchange development strategy is ideal for a number of reasons. Firstly, helping enterprises – in particular small and medium enterprises (SMEs) – to find funding via the capital markets is the focus of economic policy at both the European and the global level. To promote this policy, in 2015 the European Commission presented its concept for the Capital Markets Union, while in 2012 the USA passed the Jobs Act, with the main objective of fostering employment and innovation by developing capital markets. Capital markets may also serve to promote a more effective distribution of EU funds in the period 2016-2020. This framework provides opportunities for EU funds to be used to strengthen the economic role of the stock exchange, so there is a realistic chance of generating an advanced, effectively functioning capital market in Hungary by 2020.
Achieving the strategic goals will require even closer cooperation than before with the government, state institutions and market players in order to create a business and regulatory environment which actively supports balanced growth in the Hungarian economy through improvements to the capital market and the BSE. This will shift the BSE’s role as a catalyst into the foreground, reverse the downward trend in stock market turnover witnessed in the last few years, raise the capitalisation of companies listed on the stock exchange as well as the number of stock market offerings, and improve the profitability of BSE in the medium term.
Implementation of the strategy will benefit from the fact that BSE is, since December 2015, once again under national Hungarian ownership, and thus enjoys the support of the Central Bank of Hungary (MNB), an owner that is committed to developing the capital market. This in turn reinforces the commitment of economic players towards BSE, as it conveys a positive image of the future of the capital market and increases general confidence in the Hungarian stock exchange.
The Hungarian stock market has not yet recovered since the global financial crisis, and turnover has fallen by 70%, the largest decrease in the region; moreover, the proportion of BSE-listed shares held in the asset portfolios of Hungarian private and institutional investors is very low.
The most urgent task at present is to promote successful stock market launches by assisting initial public offerings (IPOs) of enterprises that can demonstrate stable performance, that have a business strategy offering serious growth potential, that meet the demands for high quality that will bolster investor confidence, and which therefore will attract substantial investor interest. Furthermore, it is important that the IPOs are priced at a level that will facilitate future improvements in stock prices. The period beginning in 2016 may be an ideal time for IPOs, both for enterprises and for investors. As a result of positive trends in the Hungarian economy, the BUX index, which reflects the performance of Hungary’s share market, rose by 43.8% in 2015, significantly above the rate achieved in regional and more developed markets. In consequence, new offerings can take place at higher prices than in previous years, which is especially favourable for the owners of the enterprises entering the stock market; at the same time, in a climate of record low yields for the Hungarian forint (HUF), IPOs are worth purchasing even at such levels of valuation, as substantial return premiums can be expected compared with bonds and other money market investments.
The task of identifying and selecting enterprises that are ready for the stock exchange, and preparing them for the launch process, is one of crucial importance, and there is therefore a need to expand and broaden the consultancy services offered to issuers, and to develop an effective method of screening (scoring). One way of doing this is to set up a stock exchange “antechamber”, which operates with the active collaboration of specially contracted top market players – IPO Partners –, who help to bring together companies that are interested in raising capital market funds; the new companies are then evaluated and selected in order to prepare them for launching on the regulated or the SME market. The essence of the IPO Partner programme is to gather a broader spectrum of stock exchange stakeholders. Consultancies, commercial banks, investment services and other parties with an interest in launching enterprises onto the market and in promoting prudent operations (e.g. angel investors, private and venture capitalists) can, in conjunction with BSE, make active contributions to the process of preparing enterprises in the antechamber and to making their offerings a success.
One of the key target groups for expanding the spectrum of issuers consists of state enterprises; the feasibility of launching such enterprises on the stock exchange and the effects of their capital market presence will be examined by the government. Identifying larger corporations and SMEs that may represent a good investment alternative, and assessing their stock market viability, is another essential component for building up a diverse issuer structure and for further increasing stock market turnover. For issuers, this represents immediate, continuous and long-term capital-raising opportunities, which will increase competitiveness and provide good incentives for management and staff alike. In the case of SMEs, quality assurance is of particular importance, and this can be provided by having the IPO Partners carry out due diligence screening.
In view of the circumstance that the relatively high cost of launching on the capital market has, in the past, proved to be a major obstacle for SMEs wishing to raise funds from the capital markets, it is essential that the costs of consultancy and preparation are subsidised by state or EU funding.
To meet the special needs of SMEs, it will be necessary to establish a new SME market to support the presence of large numbers of SMEs on the capital market, and to help them obtain funding. The SME market will include the following:
A multilateral trading facility (MTF) for companies which are ready to operate in the public sphere but which are not at a stage of development that allows them to meet the requirements for launch on the regulated market.
A private placement platform (PPP) for enterprises which are not yet ready to operate in the public sphere but which are looking for capital investors to enter into private transactions, and which may later transfer to the public markets.
A crowdfunding platform – to be launched at a later stage of the strategy timescale – operating under a separate brand name from the other markets of BSE, whose objective is to finance start-up businesses with the involvement of large numbers of investors, each investing lower sums of capital.
It would also be expedient to use EU and state funds to support the market launch of new enterprises, as this could be decisive especially with regard to improving the capital structure of SMEs. The aim is to create special capital bases that focus on the Hungarian market and promote the channelling of EU financial funding, which – as well as generating extra demand as an investor – will provide a risk-sharing instrument to private investors, and an exit opportunity to owners investing in an enterprise at start-up.
The fact that Hungarian state institutions are paying particular attention to developing the domestic capital market to achieve long-term, sustainable economic growth and innovation, is an important message for economic players. The state can contribute to stock exchange development in a number of ways, in particular by establishing a market-friendly regulatory environment, and by promoting the use of EU resources to develop the stock exchange.
BSE is conducting negotiations with the Ministry for National Economy on formulating a regulatory package that will assist capital market development, affecting questions of importance to IPO enterprises and their investors, and thus encouraging stock market entry and increasing demand for products introduced on the regulated market. The key components of the package recommended by the BSE are:
- Fine-tuning the processes of stock market launches and offerings, increasing security, and providing discounts related to stock market presence.
- Incentivising increases in the proportion of stock exchange shares in the portfolios of Hungarian investors by reducing administrative and other burdens linked to share exposure.
- Encouraging market liquidity, and supporting the market-making and analytical activities of investment service providers.
The legal frames for operating the Hungarian capital market are increasingly strictly determined by the international regulatory environment, in particular the new EU capital market directive, MiFID II, and the associated regulation, MiFIR, which Member States are expected to have to comply with from 2018. The new regulations, which will affect all European capital markets, will also have a considerable impact on the operations of the BSE: some directly concern BSE’s main activity, while others are more indirect, and concern investment service providers.
The objective is to ensure that the role of BSE is consolidated further both in the financing of enterprises and in the development of the financial culture. To help achieve this, the BSE devises wide-ranging educational programmes, organises institutional roadshows as well as national and international capital market conferences, maintains active contact with domestic and international investors, and strives to exert an influence over both corporate leaders and investors through sustaining an intensive media presence. The BSE’s makeover and renewed brand structure contribute to a reinforcement of the image of the capital market, and strengthen the messages about the stock exchange that the BSE wishes to plant in the public consciousness, of which the most important are:
For issuers: offering shares and bonds on the stock exchange is a realistic financial alternative.
For investors: at the BSE it is possible to invest in elite Hungarian enterprises and in a wide, supplementary range of investment products, and higher ROIs can be achieved by taking on higher risks. Reinforced investor-protection rules and supervision guarantee the security of capital market investments.
For investment service providers: the new strategy of the stock exchange supports value-added services (market-making, analysis).
For the government: the stock exchange is one of the basic pillars of successful economic growth, and is worth developing jointly with state support.
Although educational and marketing communications activities contribute indirectly to building trust in capital market institutions – such as the stock exchange itself – BSE is also planning direct interventions of this nature. These place the main emphasis on improving the reputation of issuers introduced to the stock exchange, strengthening BSE’s system of monitoring and sanctions, protecting minority shareholders, and – in collaboration with MNB – more effective screening of cases that have the potential to influence the market; in addition, they are also partial supplements to the investor-protection measures already implemented by legislators in order to increase demand in shares among small investors.
The strategy concentrates primarily on boosting the domestic share market, with supplementary objectives being developing certain submarkets and increasing revenues not directly associated with share trading. BSE is examining possible breakthrough opportunities in the derivatives, commodities and securities sections, as well as in data sales.
In order to achieve the objectives, besides attracting new issuers and partners, it is extremely important to incentivise the enterprises and trading companies already present on the stock exchange, and to provide them with high standards of service, so when implementing the strategy, the BSE places particular emphasis on ensuring that the planned measures are also beneficial to existing stakeholders, with special regard to our largest issuers and to foreign institutional investors, responsible for generating the lion’s share of our turnover.
Since the change of ownership, BSE is also focused on becoming a full member of international stock exchange organisations, where opportunities can open up for maintaining contact with stock exchanges in other countries – both in the same region and in the Far East – and for collaborating with international bodies that may assist in or contribute to the success of the Hungarian capital market.
The business strategy is actively supported by the IT management and HR policy of the BSE. While the former concentrate on ensuring stable operative activities and on developing a software and hardware background that serves market and product development and is optimised to suit market players as well, the latter is focused on recruiting and keeping a team of outstanding professionals to support our consultative sales activity.