IR professionals feeling relaxed and happy after the holidays had better take a deep breath, because there are major shockwaves coming in equity investment.
That’s according to a new report from the McKinsey Global Institute (MGI), the “business and economics research arm” of management consulting firm McKinsey & Company.
The researchers say that changes in the global economic landscape will create by 2020 a $12.3 tn gap between equity investment needed and what is offered.
Bond demand growing
On one hand, populations in developed countries are aging. Their individual investment habits will shift, moving more toward bonds as they seek stable value they can draw on. Pension funds will do the same, driving significant money out of the equity markets.
At the same time, the global distribution of wealth is changing, shifting more money into the so-called BRIC countries (Brazil, Russia, India and China) as well as other parts of Asia and South America.
According to the firm, 21 percent of total global financial assets were in emerging economies as of 2010; that will jump to 30 percent in 2020.
Investing habits in these counties are different than in the West. Emerging economies have 15 percent of household portfolios in equities, on average, compared to 42 percent in US households.
Combined with developed countries’ shift from equities to bonds, and, absent a big change in investor habits, MGI estimates that only 22 percent of financial assets will be in equities in 2020, compared to 28 percent in 2010.
Why the hesitation?
There are practical reasons for the hesitation in emerging economies to invest in equities, as the Economist notes:
‘Companies in emerging markets are often not as transparent as those in the developed world, nor do they have a record of treating minority shareholders well,’ it writes.
‘Institutional investors – mutual funds, insurance companies, pension schemes – are not as well established in developing countries as they are in Europe and America.’
The loss of investment dollars will result in that $12.3 trillion gap. Corporations will have to move more toward debt financing, particularly in emerging countries, where the gap would be largest. That could radically change the role of equity investment in funding growth and building wealth.
An MGI director and the group’s director of research say that business and government leaders will need to find strategies to deal with the situation before it becomes a crisis:
‘Corporate and government leaders need to develop new incentives and products to boost saving that will keep more money flowing into stocks,’ they say.
‘Policy makers should review tax provisions that are biased against stocks and also make sure that new regulations affecting banking, insurance and pensions don’t have the unintended effect of helping move the world away from equities.’
Of course, there was quite a bit that leaders should have done to avert the economic crisis that has had the world in its grip. Well, perhaps next time will be different.
