For the last 30 years, growth in financial assets was primarily driven by rapid increase in equities and private debt securities in countries such as United States, Japan and Europe. The world’s financial assets – including equities, private and public debt, and bank deposits rose from $11 trillion to $194 trillion, becoming four times the size of GDP.
The United States has the dominant share of the global financial markets with $50 trillion(385% of GDP) of assets. The eurozone is second, with nearly $40 trillion (314% of GDP). Japan ranks third with $26 trillion(533% of GDP) and the U.K. market has less than $8 trillion(325% of GDP) of financial assets. Asian financial markets remain fragmented and have very different characteristics. Japan has a huge government-debt market, whereas China holds 75% of its more than $12 trillion(270% of GDP) in financial assets as bank deposits. India's financial system is tiny, with only $2 trillion( 160% of GDP) in assets -- possibly ranking as the global dark horse in the decade to come.
However, after the 2008 downturn, the drivers of future growth have likely shifted. There is a growing consensus that going forward, growth in financial assets would be led by emerging markets such as China and India. There are primarily two reasons cited for this – one, the fundamentals support it; second, there is enough room for them to grow.
Equities have been the fastest growing asset class in mature markets since 1990, as corporate earnings and price earnings ratio increased. But now, earnings growth has slowed and valuations fallen. In developed markets, GDP growth is likely to more modest due to aging population and mounting government debt- little reason to believe that corporate earnings would grow, if at all from domestic growth. On the other hand, emerging economies will likely grow much faster on the back of better demographics and high savings rate. India alone would have 270mm net increase in working age population (almost the size of the US) and middle class would nearly quadruple from 22 mm to 90mm. Subsequently, consumer spending would increase by four times to $1.2 trillion by 2025. Secondly, these countries lack basic infrastructure and hence massive amounts of financing will be required to build them. India alone would need about $1.2 trillion capital investment to build its roads, metros and cities.
Thirdly, the growth of the equities will also be driven as more state owned enterprises are privatized and as existing companies expand. It is commonly believed that only about a fraction of the companies are listed in emerging markets, while about 70% of the companies’ trade on the exchanges in the US. Similarly the corporate bond markets and other private debt securities would grow with significant legal and financial reforms.
The third big factor contributing to the growth of financial assets would be bank deposits. Currently 2.8 bn people in emerging countries are unbanked. For instance in India, more than 50% of the household savings are pooled into hard assets such as housing and gold. Bank deposits would grow significantly as more of the unbanked are brought into the mainstream financial system. As more and more people open savings accounts and household savings grows, deposits would grow.
More importantly, if we compare the size of financial assets in terms of GDP, more commonly known as financial depth, most emerging markets are tiny compared to the US and other mature markets. The total value of all emerging market financial assets is equal to just 165 percent of GDP – just 145 percent if we exclude China – well below the 403 percent financial depth of mature economies. Clearly there is a lot of room for the assets of these economies to grow.
Clearly, all these factors combined would lead to substantial growth of financial assets in the emerging markets in the next twenty years; their relative share in the global capital markets would only gain further prominence. It is simply too glaring to be ignored any longer.
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