Firms may face $12.3 trillion equity gap by 2020

Firms may face $12.3 trillion equity gap by 2020
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First Published: Fri, Dec 09 2011. 12 43 AM IST

Updated: Fri, Dec 09 2011. 12 43 AM IST
Mumbai: Companies across the world looking for equity capital may face a shortage of about $12.3 trillion by 2020 as investors avoid publicly traded stocks, according to a McKinsey and Co. report.
Investors’ share of holdings in publicly traded equities among global financial assets will fall to 22% by 2020 from 28% now, making equity costlier and less available, the report said. The lack of equity capital may lead companies to take on debt and this in turn could lead to financial distress and even bankruptcy in a volatile market.
The McKinsey Global Institute (MGI) report, The Emerging Equity Gap: Growth And Stability In The New Investor Landscape, released on Thursday, is based on a study of 18 developed and emerging nations, including India. McKinsey says these nations will need to raise $37.4 trillion of additional capital for supporting growth and reaching their financial goals.
Also See | Firms may face $12.3 trillion equity gap in 2020(PDF)
The report says the shift away from publicly traded equities could be a function of an increase in the financial assets of investors in emerging economies to as much as 36% from 20% now. Emerging market investors keep most of their assets in bank deposits.
Besides, an ageing population and growth of alternative investments such as private equity are reducing investors’ appetite for equities in developed markets.
While the report says financial assets in emerging markets will grow faster than those in developed economies, the way forward for India is not clear. The wealth of Indian households is expected to grow rapidly in the coming decade. “The prospects for India to develop a significant equity investing culture are unclear,” the report said.
Households are the largest investor class in India, holding 42% of financial assets—$835 billion out of $2 trillion. Equities accounted for only 8% of the Indian household financial assets in 2010.
Investors in developed economies hold nearly 80% of the world’s financial assets today—or $157 trillion—but these pools of wealth are growing slowly relative to those in emerging markets.
“Between the rising wealth of emerging market investors and changing behaviours of investors in developed economies, powerful forces will be reshaping capital markets in the next decade,” said Charles Roxburgh, a London-based director at MGI.
“Investors in developed economies held nearly 79% of these assets. But by 2020, we project that investors in China and other emerging economies will account for one-third or more of the world’s financial assets, nearly doubling their 2010 share,” the report said.
Over the past decade, total financial assets held by emerging market investors grew at a compound annual rate of 16.6%, nearly four times as fast as the financial assets of developed country investors, the report says.
Ageing is the biggest factor affecting investor behaviour in mature economies. As investors enter retirement, they typically stop accumulating assets and begin to rely on investment income, shifting assets from equities to fixed-income instruments. This pattern has led to predictions of an equity sell-off. The report says that if investors retiring in the next 10 years maintain the equity allocations of those who have retired now, equities will fall from 42% of US household portfolios to 40% in 2020 and 38% by 2030.
“At a time when the world is struggling to reduce debt, these trends will create headwinds. So it’s important to understand how the forces driving the shift away from equities can be blunted or even reversed,” said Susan Lund, another director of research at MGI. Lund says that while some of these forces are irreversible—for instance, ageing cannot be stopped—new policies and financial products can help shift investor behaviour and reduce the effects on equities.
Graphics by Sandeep Bhatnagar/Mint.
deepti.c@livemint.com
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First Published: Fri, Dec 09 2011. 12 43 AM IST