Concept of capital markets explained

The National Business
While we look at the whole economy as a “big fish”, there are however parts to it that make up the whole concept of the economy. One such part is the Capital Markets. Not many Papua New Guineans are familiar with the Capital Markets concept and its function. JMP Securities general manager Lars Mortensen explains the challenges in PNG Capital Markets.

By NATHAN WOTI

Q: What is Capital Market?
MORTENSEN: Capital markets are financial markets that bring buyers and sellers together to trade stocks, bonds, currencies, and other financial assets. Capital markets include the stock market and the bond market. It is like a place where buyers and sellers indulge in trading (buying and selling) of financial securities like bonds, stocks or assets. The trading is undertaken by participants such as individuals or institutions. Capital market trades mostly in long-term securities.

Q: What are some challenges in PNG Capital market and how do we fix them?
MORTENSEN: Access to capital markets in PNG is constrained by the stringent requirements on the opening of trading accounts. A lot of potential investors struggle to meet the requirements imposed on the sector in terms of identification and explanation of sources of funds. A functioning and well-proliferated National ID scheme will help to facilitate access to financial services generally and capital markets in particular. We also have to have:

  • LIQUIDITY and volumes in the market; and,
  • INCREASING investment opportunities in the market. These two challenges are inter-related. We need to increase the investment options for investors. That is the only way to attract more investors and get them to trade more actively.
Graphs showing PNG Capital Markets this year. – Source JMP Securities

This means we have to successfully execute more Initial Public Offerings (IPO). One of the greatest challenges for a market like ours is liquidity and trading volumes. To a certain extent, this is a “chicken-or-egg” situation. We need liquidity to attract IPOs, but we need more investment options to attract the liquidity. Currently, the market is dominated by a handful of stocks and when these are sought after, investors that want to buy shares sometimes cannot find any to acquire.
Improving access to the markets through technological improvements
Our current capital markets suffer from old systems and even older ways of doing things. Both the market operator and the brokers in the market need to invest in more up-to-date technology to improve investor’s access to information and trade execution more seamless. We need to integrate all market participants so that trading is more efficient.
Investor education
All market participants need to do more to ensure that the investing public – both individuals as well as companies and institutions – are kept informed as to what is going on in the economy and within the businesses that seek capital in our capital markets.
Regulations and tax regime changes
For example ensuring that capital market solutions and investment options do not disadvantage investors would be very welcome. In particular, we look forward to improvements in the fiscal regime as it pertains to Exchange Traded Funds, Unit Trusts and other markets. We believe that diversified and more broad-based investment products have the potential to significantly impact on investors’ savings whilst at the same time mobilise considerable capital for companies that have investment plans and needs.
Capital mobility and FX issues
Capital markets in PNG and the rest of the world are interconnected. Investors look at options across markets and international boundaries.
The only way for PNG capital markets to start to attract foreign capital and investors is for the current restrictions and inefficiencies in foreign exchange markets to be resolved. At that point, foreign investors may start to make portfolio investments in PNG capital markets (both debt and equity) and Papua New Guinea investors can start to access global markets as well.
Conclusion
In addition to the above challenges, the macro-economic environment is of course a major force impacting on capital markets.
We need to ensure that the economic picture is positive with vibrant growth and exciting projects facilitating investments by companies and other players, which in turn will drive their need for capital.