Data from the World Federation of Stock Exchanges illustrate the extraordinary changes taking place in stock markets across the globe.
The share of market capitalization of the developed markets is shrinking and emerging stock markets are grabbing a bigger share of the pie. Such a trend is not surprising, because economic growth has been far higher in countries such as China and India and capital inflows to these markets have boosted stock prices and led to a surge of new listings. Nevertheless, a comparison of the proportion of market capitalization among exchanges in the developed and emerging world between end 2003 and July is an eye opener.
As the chart shows, the New York Stock Exchange (NYSE) accounted for a hefty 36.2% of world market cap at the end of 2003. Five-and-a-half years later, its share of world market cap has shrunk to 25.7%. The London Stock Exchange market cap shrank from 7.9% of global market cap to 6.3% over the same period. On the other hand, the Bombay Stock Exchange (BSE) market cap rose from a measly 0.9% of global market capitalization at the end of 2003 to 2.8% by the end of last month.
But that achievement was dwarfed by the spectacular growth in market cap of the Shanghai exchange over the same period, from 1.1% to 7.1%. Looking at the change in another way, the NYSE market cap at the end of 2003 was 41 times that of BSE and 31 times that of Shanghai. In?July, NYSE market cap was nine times that of BSE and just 3.6 times that of Shanghai.
Indeed, the Shanghai bourse will soon overtake Tokyo in terms of market cap.
Between end 2003 and July, the share of stocks listed in Tokyo fell from 9.4% to 8.7%. Pacific Investment Management Co. (Pimco) managing director Curtis Mewbourne points out that, according to Pimco’s computations, China’s stock market capitalization is now larger than Japan’s—just three years ago, in 2006, Japan’s was 12 times the size of China’s.
There are two forces at work here. One is the growth of the emerging economies. For example, International Monetary Fund (IMF) data show that while the US accounted for 29.6% of global gross domestic product (GDP), in dollars at current prices in 2003, its share of the global pie had shrunk to 23.5% by 2008. Japan’s story was even more dismal—its share went down from 11.4% of global GDP to 8.1% over the same period.
Graphics: Ahmed Raza Khan / Mint
At the same time, the share of China and India went up. China’s GDP was 4.4% of global GDP in 2003—it increased to 7.3% in 2008. India’s achievement was more modest, with its share of global GDP going up from 1.5% to 2% over the period.
The second factor is the listing of many new firms in the emerging markets and the discovery of their growth story by investors in the West, which has led to capital inflows and contributed to the rise in capitalization of these markets. In China, the spread of the equity cult among local investors has also been a potent force.
The decline in the share of the global pie of the advannced economies is not just due to the current crisis but is a long term trend. According to projections from Credit Suisse, (chart 2) the percentage share of global consumption of the US will decline from 30.2% in 2007 to 20.8% by 2020. In sharp contrast, the share of Chinese consumption is projected to improve from a mere 5.3% of global consumption in 2007 to 21.1% by 2020. India’s consumption, which was 2% of global consumption in 2007, is forecast to rise to 5.3% by 2020. By 2020, according to the Credit Suisse forecasts, China will be the largest contributor to global consumption and India will be the fourth largest.
This change in the global economy is likely to be hastened by the current crisis, which is expected to keep growth rates low in the West for years, as their economies deleverage, resulting in what Pimco calls “The New Normal”.
As Mewbourne puts it, the Bric (Brazil, Russia, India, China) economies “share some of the same characteristics that are significant comparative advantages in the New Normal, for example, low labour costs and extremely low levels of consumer debt. They also have large population, so domestic demand can truly move the needle on a global scale”.
The hope is as the US consumer starts saving, the Chinese will start splurging, paving the way for a resolution of those pesky “global imbalances”. To be sure, the process is unlikely to be smooth—no global power likes to go gentle into the good night—but the direction is more or less certain. The long-term emerging market story continues to be very attractive.
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