Reduced role of listed equities worrying: report

Several forces are converging to reshape the global capital markets in the coming decade and reduce the role of listed equities. Most important of these is the rapid shift of wealth to emerging markets where private investors typically put less than 15 per cent of their money into equities (compared to 30-40 per cent in many mature economies), followed by changes in developed economies, such as ageing, shifting pension regimes, growth of alternative investments, and new financial regulations, the report said.
The result, according to the report, will be an approximate US$12 trillion (Bt360 trillion) “equity gap” between the amount of equity that investors are willing to buy and that companies will need. MGI projects the share of global financial assets devoted to publicly traded equities could fall from 28 per cent to 22 per cent by 2020.
This gap will be seen mainly in emerging-market economies, but will also appear in some European nations. Policy-makers as well as leaders of businesses and financial institutions could take steps to avoid this unwelcome development, the report says.
“Between the rising wealth of emerging-market investors and changing behaviour of investors in developed economies, powerful forces will be reshaping capital markets in the next decade. The likely result – a capital markets system in which equity represents a smaller portion of total financial assets – is an unwelcome development,” says Charles Roxburgh, London-based director of the McKinsey Global Institute.A global capital markets system with a significantly reduced role for publicly listed equities has important implications for companies and investors. Facing rising costs for equity, companies would need to use more debt to fund expansion, which would raise bankruptcy risk in recessions, slow growth and make economic cycles more volatile, the research concludes.
The report provides comprehensive new data and insights into how the world’s financial assets are growing and being invested, and how these assets could evolve over the next decade.
Among the main findings:
n Investors in developed economies hold nearly 80 per cent of the world’s financial assets today – or $157 trillion – but these pools of wealth are growing slowly relative to those in emerging markets.
n The financial assets of investors in emerging economies will rise to as much as 36 per cent of the global total by 2020, from about 20 per cent today. But unlike in developed countries, the financial assets of private investors in these nations remain concentrated in bank deposits.
n Chinese financial assets, which rose from $3.4 trillion in 2000 to $20 trillion in 2010, are projected to reach as much as $65 trillion in 2020.
n Businesses in emerging markets (today’s listed companies and those that will sell public shares) will need an incremental $18.4 trillion in equity, representing a 180-per-cent increase over 2010 levels.
n Several factors are also reducing investor appetite for equities in developed countries: ageing population; shifts to defined-contribution retirement plans; growth of alternative investments such as private equity; regulatory changes for financial institutions; and a possible retreat from stocks in reaction to low returns and high volatility.
n Ageing affects demand for equities in developed nations. In the US, participants in 401(k) plan mutual funds who are in their 20s allocate 54 per cent of their retirement funds to equities; those in their 60s allocate 38 per cent.
Based on these trends, MGI projects the share of global financial assets in publicly traded equities will fall from 28 per cent to 22 per cent by 2020. That will create a growing “equity gap” over the next decade between the amount of equities that investors will demand and what companies will need to fund growth. 
 As a result, companies could see the cost of equity rise over the next decade and may respond by using more debt to finance growth.