Short of a very rapid change in investor behavior and adoption of new policies in the largest emerging economies, the role of equities in the global financial system may be reduced in the coming decade.
Several forces are converging to reshape global capital markets in the coming decade and reduce the role of listed equities. The most important of these is the rapid shift of wealth to emerging markets where private investors typically put less than 15 percent of their money into equities (compared to 30–40 percent in many mature economies). At the same time, demand for listed equities in developed economies is likely to fall due to aging, shifting pension regimes, growth of alternative investments, and new financial regulations.
The result will be a potential $12 trillion “equity gap” over the next decade between the amount of money that investors will wish to hold in equities and the amount that companies will need to fund growth. MGI projects that the share of global financial assets held in listed equities could fall from 28 percent to 22 percent by 2020 if these trends continue.
The report provides comprehensive new research and insights on the size, growth, and asset allocations of investor portfolios, and how these assets could evolve over the next decade.
The potential equity gap, modeled on detailed data from 10 mature economies and eight emerging ones, would be seen largely in emerging market economies, but would also appear in some European nations. This has important implications for economic growth, how companies fund themselves, and how investors with lower holdings of equity can reach their saving goals.
MGI concludes that many of the forces driving the shift away from equities can be blunted or even reversed and proposes measures that business leaders and policy makers should consider. These include removing barriers to equity investing in developing economies, raising saving rates in developed nations, introducing product innovations and redesigns in the financial services industry, and reviewing incentives that cause corporations to favor debt over equity.