Few stock markets were spared when investors suddenly lost faith in technology and Internet shares last April. But for the Neuer Markt, Frankfurt's market for growth stocks, the sell-off marked a turning point.
Not only has the Neuer Markt's main index halved since then, but questions have been raised by several upsets involving companies listed on the exchange. The problems culminated last week with the resignation of Mr Josef Nagel, its chairman.
Most bankers believe the Neuer Markt is simply encountering upsets common among smaller company markets. "The Neuer Markt is an infant turned young adult in the space of three years. No wonder everyone around it has been struggling a bit to keep up with the pace," says a senior German investment banker. Yet if the Neuer Markt's image becomes tarnished by the problems, companies and investors could gravitate towards other markets.
The market was set up in March 1997, and has flourished amid a sustained flow of investment and new listings. Its emergence as the strongest European competitor to the US Nasdaq market made it a key part of the now-collapsed proposal to merge the London and Frankfurt exchanges. Although the market's total capitalisation of €200 billion ($176 billion) is one-thirtieth that of Nasdaq's, it is almost six times that of its nearest European rival, the Paris-based Nouveau Marche.
But this progress was rudely interrupted by the misadventures of two small companies. Early last month, Infomatec, a software outlet, announced that its two "designated sponsors" - the banks that make a market in its shares - had resigned. The resignations followed over-optimistic claims by the company that it was about to win large contracts. Schutzgemeinschaft der Kleinaktionare, a pressure group for minority shareholders, has called for criminal charges to be brought against two Infomatec managers.
Shortly after this, Gigabell, a cash-strapped telecommunications and Internet services group, became the first Neuer Markt company to file for insolvency. These incidents together shook the confidence of already nervous investors. In September, the Neuer Markt gained only 0.5 per cent, the worst performance of any continental growth-stock markets. They have also led shareholders and fund managers to accuse the large banks that bring many companies to the Neuer Markt of failing to provide good information.
Similar upsets are relatively common among companies listed on other growth markets, partly because listing requirements tend to be less stringent than for bluechip markets. But the Neuer Markt was supposed to provide investors with an unusually strong degree of protection. But some investors have accused the bank's primary market departments of failing to assess properly companies' business plans and the expertise of their managements. Half of this year's 119 initial public offerings (IPOs) are at below their issue price.
Bankers argue that the blame lies elsewhere . . . with the companies and their advisers. They say some companies have talked up their own shares and fuelled unrealistic expectations among investors. The tensions have been increased by anomalies in the regulation of the market. While founding shareholders are banned from selling their shares for at least six months following a flotation, they are under no requirement to inform the public if they do so after that. This has caused resentment among some shareholders. Capital market irregularities, such as improper share dealings, fall under criminal law in Germany. The state prosecutor has discretion over whether to pursue a case, in effect barring shareholders from launching their own class-action suits.
Given the poor mood among some investors, the resignation of Mr Nagel, the Neuer Markt's chairman since January 1998, was bound to raise questions. For now, the controversies do not appear to have caused a full-blown crisis of confidence in the Neuer Markt. While other growth markets have seen a downturn in their IPOs, 26 companies listed on the Neuer Markt in the traditionally quiet months of July and August.
And even the fall in valuations over the past five months has left many Neuer Markt companies still trading at valuations far above their US peers.
