A new stock exchange has recently started operating in Mexico: The Institutional Stock Exchange (BIVA). After five years of arrangements – the concession was approved in August 2017—, BIVA has arrived to make the sector more dynamic, creating a more competitive financial setting for the country. Here are a few tips for understanding the role of this new alternative:
- New investment options: Medium-sized companies comprise BIVA’s target market, a type of company that very often reports the greatest prospects for growth in the medium and long term and that were previously unavailable to investors.
- More funding options: BIVA offers more financing options for a segment of smaller companies than those already listed on the traditions Mexican Stock Exchange (BMV), since they will now be able raise funds through more competitive mechanisms that were previously unavailable on the market.
- Innovative investing: BIVA has formed an alliance with Nasdaq, thus enabling it to use the best technology available. BIVA hopes for listings of companies from all of Mexico’s productive sectors that are willing to use innovative methods to finance their projects.
- Access to more companies: Under the current BMV system, in order to access the capital market, a company needs to have a capital value of at least 3,166 million dollars, a requirement too high for the large majority of companies to meet. BIVA lowers this requirement to between 500 and 800 million dollars, thus attracting a business sector that beforehand could not be considered as a candidate for listing its companies on the stock exchange.
- Launched with 52 issuing companies: The index of the new bourse, called FTSE BIVA, is not made up of a fixed number of issuing companies. It has started operating with 52 issuing companies, but this number, and the weights of the same, will evolve as more companies join the market to list their companies in this new stock exchange, so that the composition and form of the index will gradually change.
Why is it important for Mexico to have a new stock exchange?
Mexico is one of the 15 most important economies in the world. However, such importance has not been reflected in the total value of the Mexican Stock Exchange (BMV), compared to that of other stock exchanges in the world, in both developing and developed countries. For example, according to Table 1a, the total value of the BMV is 371 billion dollars, while the combined value of the stock markets in Spain reaches 753 billion dollars, i.e. a value twice that of the BMV. Moreover, the value of Brazil’s stock markets is 893 billion dollars, which, according to Table 1b, is equivalent to 2.4 times the value of the BMV. Finally, the stock market in the United States, the largest in the world, has a value of almost 82 times that of the Mexican Stock Exchange.
In addition, calculating the Total Stock Exchange Value/GDP ratio reveals the importance of the stock market in a country’s GDP (which measures the total production of goods and services in a country in one year). According to Table 2, in the case of Mexico, the total value of the stock market represents 32.3% of the total value GDP, while in Brazil it represents 43.5%, 51% in China and 156% in the United States, with the latter value reflecting the global importance of the US stock market. These figures clearly show that Mexico still has a long road ahead regarding the strengthening of the stock market and its weight in the country’s economy.
An analysis of the number of companies listed in the Mexican Stock Exchange and comparison with the number of companies listed in other countries’ stock markets, proves the growth capacity still existing for the Mexican market. For example, Table 3 shows data from the World Federation of Exchanges in 2017, which reports the number of companies listed in the BMV as 148, 50% less than in Brazil, with 343, while Germany has 499 companies. It must be noted that in countries such as the United States and China, the number of listed companies is 35 times higher than in Mexico. The inclusion of BIVA is expected to increase the number of companies that participate in the stock market.
Is the inclusion of BIVA enough?
Even with the arrival of BIVA, the Mexican financial sector still has a long way to go to increase financing options in market segments that do not have a sufficiently diverse range of choices to finance their investment projects. For example, Euronext segments markets according to companies’ capitalization value. Segment A includes companies with a market capitalization of more than one billion euros; segment B companies valued between 150 million and one billion euros; and segment C companies with a market capitalization of less than 150 million euros.
Brazil’s stock market has also been segmented so as to serve companies with diverse characteristics and to be able to build financing schemes that are better tailored to each company and thus further drive the development of the capital market. These segments are not only constructed so that companies with a variety of capitalization values can access the market, but also to provide the opportunity to list legally incorporated companies with very diverse characteristics.
In Mexico, even though BIVA will give more companies access to the stock market, exploring mechanisms that will provide more companies with more financing systems is of utmost importance, but, above all, they need to be more competitive.