by Gabriel Lacroix | Friday, 25 April 2008
In its Mapping Global Capital Markets: Fourth Annual Report, global consultancy McKinsey & Company identifies five trends that will influence the world’s financial markets long after the present bout of turbulence ends.
McKinsey’s analysis is based on financial market data over the 26 years to 31 December 2006, the latest point at which global data for all regions of the world is available.
1. Europe set to ascend
The pecking order in world markets is beginning to shift. Though the US remains the largest and most liquid financial market, Europe is fast approaching the scale of the US market. Moreover, the euro is emerging as a rival to the US Dollar for the title of the world’s global currency. “In mid 2007, the value of euro currency in circulation surpassed that of dollar notes in the world for the first time, and the euro has been the top choice in the issuance of international bonds,” the report notes.
2. China shines, Japan falters
The importance and influence of China on global markets continues to grow. Today, its financial market is roughly three times its GDP. “Enriched by bulging trade surpluses, China also became the world’s largest net exporter of capital in 2006,” the report notes. “Asia’s other contenders for financial hubs – Hong Kong, Singapore and Taiwan – now have larger cross-border investments with China and other emerging Asian nations than Japan does”, the McKinsey writes.
3. Emerging markets growing fast
Since 1990, the total value of financial assets in emerging markets has grown at more than twice the rate of those in developed country (21% versus 8% respectively). Altogether, emerging market financial assets were worth more than US$23.6 trillion by the end of 2006. Still, emerging markets only accounted for 14% of global financial assets, significantly less than their 23% share of global GDP.
4. Cross-border capital flows increasing
As globalisation increases, so too does the flow of money between countries and regions, McKinsey notes, adding that cross-border capital flows can take many forms, including foreign direct investments (FDI), and cross border lending and deposits. The study found that in 2006, cross-borders flows climbed to US$8.2 trillion, US$1.3 trillion more than in 2005, and three times the 2002 level. Cross-border investing is still dominated by developed economies, with the US, UK and Europe accounting for more than 80% of transactions. Europe accounts for half of the growth over the last ten years, mainly due to the integration of the region’s financial markets. However, cross-border capital flows into emerging markets have grown at nearly twice the rate of their developed counterparts, to US$700 billion in 2006, less than 10% of the global total. McKinsey warns about the lack of any clear international authority to regulate new activity and players in global capital markets.
5. The rise of foreign ownership
As capital flows between border increases, so too does foreign ownership of financial assets. The global value of all foreign investments – the sum of those annual flows – grew by US$10.8 trillion in 2006, up 17% from the previous year, to US$74.5 trillion. Today, foreign investors own one in three government bonds around the world, McKinsey writes. This level of ownership has tripled since 1990. On the global front, the US remains the largest foreign investor, however European countries are not far behind. Together, they now have as many financial links with other regions of the world as the US. McKinsey notes that Asia lacks a single dominant financial hub – hence it has relatively weak cross-border financial ties within the region. But there are other countries playing an increasing role in foreign ownership. The oil rich nations of the Middle East have poured trillions of dollars into foreign investment and, in 2006, for the first time, the Middle East became the world’s net supplier of capital.
© 2008 financialalert Limited.
