Equities losing appeal in global financial system - survey

Last Updated: Thu, Dec 08, 2011 07:55 hrs

Equities are losing their role in the global capital markets, creating a gap over the next decade between investor demand and companies' needs to fund growth, according to a new study on Wednesday.

The McKinsey Global Institute study projects that the share of global financial assets in publicly traded equities could fall to about 22 percent by 2020 from 28 percent now.

"This gap will amount to approximately $12.3 trillion in the 18 countries we model, and will appear almost entirely in emerging markets, although Europe will also face a gap," the report said.

As a result, the cost of equity for companies could rise, forcing them to resort to debt to finance growth. It said companies, especially banks, that need to meet capital requirements could find equity more expensive and less available.

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"With more leverage in the economy, volatility may increase as recessions bring larger waves of financial distress and bankruptcy," the report said.

"At a time when the global economy needs to deleverage in a controlled and safe way, declining investor appetite for equities is an unwelcome development."

Factors ranging from aging populations to the growth of alternative investments such as private equity, to increased volatility in stock markets were sapping investor appetite for equities in developed nations.

The study predicted that emerging markets will become an important force in shaping the global financial system over the next decade.

While investors in developed nations now hold nearly 80 percent of the world's financial assets, that is growing slowly relative to emerging markets, the study said.

"The financial assets of private investors in emerging economies will rise to as much as 36 percent of the global total by 2020, from about 21 percent today," said the report.

"But unlike in developed countries, the financial assets of private investors in these nations currently are concentrated in bank deposits and government securities."

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Emerging market financial assets grew 16.6 percent annually over the past decade, nearly four times the rate in mature economies. These assets stood at about $41 trillion in 2010 and constituted 21 percent of the global total, up from 7 percent in 2000, the report said.

"Depending on economic scenarios, we project that emerging market financial assets will grow to between 30 and 36 percent of the global total in 2020, or $114 to $141 trillion," it said.

The study forecast China's financial assets could be as much $65 trillion by 2020 and India's could reach $8.6 trillion.

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