The heads of the three regional stock exchanges yesterday charged the importance of the capital market in driving the economy, but noted it was contingent on investor confidence and a stable macroeconomic environment.

Barbados Stock Exchange (BSE) general manager Marlon Yarde said the revival of the capital markets “is essential for economic growth” while speaking yesterday at Jamaica Stock Exchange’s fifth Annual Conference on Investments and the Capital Market

Yarde said the capital markets have a primary role in “connecting entities with surplus funds to those that require the capital” and argued for freedom of the capital markets to allocate capital efficiently, a factor he said would assist in economic recovery.

“Without efficiently run capital markets investors have limited means to diversify their portfolios,” Yarde noted.

He added that without a way to diversify and therefore spread risks, investors will turn away from the equities market towards lower yield, less risky investment opportunities, many of which do not encourage innovation to help grow the economy.

“A country that restricts its capital markets is unattractive to investors and makes it more difficult on local companies,” Yarde said.

Marlene Street Forrest, general manager of the JSE said that while there is no published studies on how much the capital markets have declined, market performance, which shows a downward trend in volume traded, suggests that there has been some negative effect of the global financial crisis.

“Based on market confidence alone, if all the markets were going down, it would affect our market,” she noted.

“When we look at volumes we see that in terms of the Barbados Stock Exchange there was an 8.75 per cent decline in volumes traded over 2008, in Trinidad and Tobago, 40.39 and in Jamaica 40.23 per cent”, she said.

Market capitalisation, another indicator of how well the markets have performed, also declined by 11.1 per cent in Barbados, 36 per cent in Trinidad and 8.7 per cent in Jamaica.

“In 2009 we were below any of our operations in previous years,” Street Forrest said. “Even amid the financial crisis market players were really enjoying the high interest bonds and not concentrating as much as they should on the equities market,” she added.

But there is a hope for revival of the capital markets. Wain Iton, general manager and CEO of the Trinidad and Tobago Stock Exchange (TTSE) noted that revival on four key pillars: interest rates reduction, the prospect for economic growth, the prospect for corporate profits and investor confidence. “Revival has to have a significant increase in these metrics as well as an increase in the use of the market to raise capital through IPO activity,” Iton said.

Steven Polansky, senior director of FINRA International Affairs Services, a financial sector self-regulatory body in the United States, said that investor confidence is critical to the effective functioning of the capital markets. He said in order for the capital markets to be effective in economic development, investors should be confident that they work.

“The educated investor is a more confident investor,” said Polansky adding that good regulation was key in “building the base of investor confidence”.