Transcript Mapping global capital markets and power brokers 2011

Financial globalisation:
Retreat or reset?
McKinsey Global Institute
TASE, 12th London Investor Conference
June 2013
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Global financial assets have grown to $225 trillion, but growth has slowed
since 2007
Global stock of debt and equity outstanding1
$ trillion, end of period, constant 2011 exchange rates
Compound annual
growth rate (%)
1.9
8.1
206
165
64
47
119
37
32
29
225
54
47
50
Equity
8.0
-5.5
36
48
47
Government
bonds
8.3
9.2
Financial
bonds
10.7
1.5
Corporate
bonds
5.1
9.1
35
39
43
42
42
41
46
42
42
56
11 9
3 82
23
75
18
14
11
3 3
26
18
19
5 5
30
7
9
42
46
50
54
54
57
60
35
1990
95
2000
2005
06
2007
08
09
10
11
2Q12
345
355
307
339
335
312
312
35
7
11
13
8
1.9
218
30
39
8.1
219
56
7.8
2007–
2Q12
206
189
185
2000–
07
14
8
14
9
10
11
11
13
13
13 Securitized
15.9
loans
62
Non-securitised
5.5
loans
-0.7
4.8
Financial depth (% of GDP)
263
256
310
331
1 Based on a sample of 183 countries.
SOURCE: McKinsey Global Institute Financial Assets Database; McKinsey Global Institute analysis
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There are pockets of growth: Corporate bond issuance
averaged $1.4 trillion since 2009, double pre-crisis levels
China
Value of non-financial corporate bond issuances per region
$ trillion, nominal exchange rates
Other developed
Developing countries
Western Europe
United States
1.7
0.3
76
1.3
0.2
13
0.2
0.2
22
0.5
19
0.6
9
1.4
0.1
0.1
0.1
0.8
0.1
0.3
0.4
2000
0.7
0.1
0.2
0.4
01
0.7
0.1
0.1
0.6
0.4
0.1
0 0 0.2
0.1
0.5
0.5
0.1
0.1
0.1
0.1
0.1
0.2
0.3
0.2
0.2
02
03
04
05
0.2
0.8
0.1
0.1
0.2
0.7
0.1
1.2
0.1
0.1
Compound
annual
growth rate,
2007–12 (%)
0.2
0.1
0.1
0.3
0.3
0.5
0.5
0.5
09
10
11
0.5
0.1
0.2
0.3
0.4
0.3
06
07
08
2012E1
1 Annualised from data through September 11, 2012.
NOTE: Numbers may not sum due to rounding.
SOURCE: Dealogic; McKinsey Global Institute analysis
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The decline in financial depth matters:
GDP growth is correlated with private-sector financing
Correlation
Slope of regression line
X axis: Household and corporate debt and equity as a share of GDP annual change (t-1)
Y axis: Nominal GDP growth (t) (%)
World
6
4
2
0
0.83
-2
0.13
-4
-40 -35 -30 -25 -20 -15 -10 -5 0
5 10 15 20 25 30
United States
8
6
4
2
0
-2
-4
-50 -40 -30
0.70
0.07
-20
-10
0
10
20
30
40
Emerging markets1
Western Europe
6
20
4
15
2
0
0.64
10
0.81
-2
0.09
5
0.23
0
-4
-30 -25 -20 -15 -10 -5
0
5
10 15 20 25 30
-40 -35 -30 -25 -20 -15 -10 -5 0
5 10 15 20 25 30
1 Emerging markets excluding China shows correlation of 0.66 and a slope of 0.20.
NOTE: Not to scale.
SOURCE: McKinsey Global Institute Financial Assets Database; McKinsey Global Institute analysis
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Cross-border capital flows fell sharply in 2008 and today remain more than
60 percent below their pre-crisis peak
Global cross-border capital flows1
$ trillion, constant 2011 exchange rates
11.8
12
10
-61%
8
6.1
6
4.9
4.6
5.3
4
2
0.5
% of
global
GDP
2.2
1.0
1.7
0
1980
1990
2000
2007
4
5
13
20
2011 2012E2
8
6
1 Includes foreign direct investment, purchases of foreign bonds and equities, and cross-border loans and deposits.
2 Estimated based on data through the latest available quarter (Q3 for major developed economies, Q2 for other advanced and emerging economies).
For countries without quarterly data, we use trends from the Institute of International Finance.
SOURCE: International Monetary Fund (IMF) Balance of Payments; Institute of International Finance (IIF); McKinsey
Global Institute analysis
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All types of capital flows have declined since 2007, and
cross-border lending accounts for half the total
Change in total cross-border capital flows, 2007–11
$ trillion, constant 2011 exchange rates
Foreign direct
investment
-0.5
-0.1
-0.6
Equity
securities
Debt securities
Western Europe
and United Kingdom
Rest of the world
Total change,
2007–11
Loans1
-0.3
-0.5
-0.8
-1.4
-4.8
(72%)
-0.4
-1.9
-2.6
-1.8
(28%)
-0.7
Capital flows, 2011
$ trillion
2.0
0.1
0.8
-3.3
-6.6
2.2
5.3
1 Includes primarily loans, currency and deposits, as well as a small share of trade credit. Excludes operations of foreign affiliates.
NOTE: Numbers may not sum due to rounding.
SOURCE: IMF Balance of Payments; McKinsey Global Institute analysis
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Since 2007, Eurozone banks have reduced foreign claims by $3.7 trillion,
$2.8 trillion of which was intra-European
Consolidated foreign claims of Eurozone reporting banks
(includes loans and other foreign financial assets)1
By counterparty location, constant 2011 exchange rates
Change
4Q99–4Q07
Eurozone bank
claims on:
Compound annual
growth rate (%)
$ billion
1,732
GIIPS2
1,609
United Kingdom
5,665
Total Western Europe
1,382
United States
Other developed
509
1,182
Developing countries
Total
8,737
-1,176
-14
12
-665
-5
16
-771
-9
11
291
Compound annual
growth rate (%)
$ billion
17
2,033
Other Eurozone
Other Western Europe
4Q07–2Q12
14
13
6
13
13
-7
-140
-8
-2,752
-9
-781
-9
-438
240
-3,732
3
-7
1 Includes banks from Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Portugal, and Spain.
2 GIIPS comprises Greece, Ireland, Italy, Portugal, and Spain.
SOURCE: Bank for International Settlements; McKinsey Global Institute analysis
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Capital inflows to developing economies totaled $1.5 trillion in 2012
and are near the pre-crisis peak
Global capital inflows to developing countries, by region
$ trillion, 2011 constant exchange rate
Compound annual
growth rate (%)
1.8
1.6
2000–07 2007–12E
1.6
1.5
1.4
1.4
1.5
1.2
1.0
1.0
1.0
0.8
0.7
0.8
0.6
30
11
Other
emerging Asia
64
2
CEE and CIS
39
-16
Middle East
31
-25
Latin America
23
4
China
24
8
0.5
0.4
0.2
0.3
0.2
0.2
% of
global
flows
Africa
0
2000
05
07
09
11 2012E1
5
9
14
46
27
32
1 Estimated based on data through Q2 2012. For countries without quarterly data, we use trends from the Institute of International Finance.
SOURCE: IMF Balance of Payments; Institute of International Finance; McKinsey Global Institute analysis
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Foreign direct investment continued through the crisis
and now accounts for 38 percent of total global capital flows
Total global capital flows
$ trillion, constant 2011 exchange rates
11.8
9.1
7.8
9.2
6.1
5.9
4.2
Equity, bonds,
and loans
3.3
3.4
2.5
FDI
FDI share of
total flows
%
1.7
5.3
7.2
4.9
3.2
2.2
4.6
6.3
4.4
5.0
2.2
0
3.4
1.9
2.6
2.1
3.2
2.9
1.7
0.2
1.4
1.7
2.0
1.7
0.9
1.0
0.8
0.9
1.5
2000
01
02
03
04
05
06
07
08
09
10
11
2012
34
27
31
18
14
19
21
22
98
86
28
39
38
1 Estimated based on data through the latest available quarter: Q3 for major developed economies, Q2 for other advanced and emerging economies. For
countries without quarterly data, we use trends from the Institute of International Finance.
SOURCE: IMF Balance of Payments; Institute of International Finance; McKinsey Global Institute analysis
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FDI is the least volatile type of capital flow; short-term lending is
the most volatile type of capital flow
Coefficient of variation of inward cross-border flows by maturity1
1Q00–4Q11
Emerging
markets
2.4
1.8
1.7
1.7
0.7
Developed
markets
6.0
Higher value
implies higher
volatility
3.2
0.7
0.9
Short-term
Long-term
Bonds
2
3
bank claims bank claims
Equity
Short maturity
0.5
FDI
Long maturity
1 Coefficient of variation defined as standard deviation normalised by the mean; calculations are made on quarterly data.
2 Maturity less than or equal to two years.
3 Maturity more than two years.
SOURCE: Bank for International Settlements; IMF; McKinsey Global Institute analysis
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After strong financial deepening from 1995 to 2007, financial deepening
decreased since then
Israel’s stock of financial assets has grown quickly…
Total financial assets, $ billion, constant 2012 exchange rates
…but the share owned by foreigners has fallen
% of Israel’s financial assets owned by foreigners1
607
556
551
208
476
573
576
148
148 Equity
…
35
185
411
244
137
148
240
69
136
58
31 8 1
37
0 0
103
69
93
104
26
23 34
14 40
20
93
135
152
176
30
118
31
46
178
Total financial assets
owned by foreign
residents, $ billions
130
124 Gov bonds
33
51
38
47
40
45
192
209
219 Loans
123
1995 2000 2005 2007 2008 2009 2010 2011 2012
-6.7
29
Fin bonds
Corp bonds
2000
2006
2011
85
143
164
Financial depth (% of GDP)
169
177
249
321
232
282
293
230
230
1 Calculated as foreign liabilities of portfolio bonds, portfolio equity, and cross-border loans to the non-financial sector from BIS reporting banks.
SOURCE: McKinsey Global Institute Financial Assets Database; IMF Balance of Payments; Bank for International
Settlements; McKinsey Global Institute analysis
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Israel’s financial markets are deeper than emerging
markets, but lag advanced economies
Equity
Financial depth, 2Q121
% of regional GDP
Financial bonds
Government bonds
Corporate bonds
Securitized loans
463
116
453
Nonsecuritized loans
61
Percentage point
change, 2007-2Q12
369
59
87
218
63
99
113
36
25
2 16
12
14
333
107
46
44
3 19
66
131
108
115
60
United
States
Japan
-37
15
230
226
57
47
19
18
9
52
16
0 19
86
Western Other
Israel
Europe developed
15
-30
132
-53
153
151
148
42
58
60
5
33
70
China
-105
2 29
7 6
48
Middle
Other
East emerging
Asia
-61
-13
131
126
56
40
26
34
5
3 33
14
4 2
3
54
35
35
India
Africa
-67
-24
108
28
21
5
1
53
Latin CEE/CIS
America
-6
-23
1 Calculated as total regional debt and equity outstanding divided by regional GDP
SOURCE: McKinsey Global Institute Financial Assets Database; McKinsey Global Institute analysis
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Capital flows to Israel peaked in 2006, but have since fallen, and now
mostly comprise FDI flows
Total capital inflows
$ billion, constant 2011 exchange rates
Cumulative capital inflows by type, 2008-2012E
$ billion, constant 2011 exchange rates
35
30
52
FDI
25
20
10
Portfolio debt
15
Ø 11
10
Portfolio equity
6
Loans and deposits
5
5
0
-5
2000
2002
2004
2006
2008
2010 2012E1
SOURCE: McKinsey Global Institute Global Capital Flows database; McKinsey Global Institute analysis
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How will the global financial system evolve from here?
1
?
2
?
SOURCE: McKinsey Global Institute
Financial globalisation retreats
▪ More balkanised, domestic driven financial systems arise:
– Global financial assets grow very slowly; deleveraging
across sectors prevails in advanced economies
– Western Europe’s cross-border flows do not recover;
regulation and shareholders drive a retrenchment in foreign
banking operations more generally
– Emerging markets can’t fill the gap: their financial systems
and cross-border flows remain constrained.
▪ More stable financial system, but slower economic growth.
Reduced access to credit, fewer opportunities for savers and
investors, and more concentrated risks
Financial globalisation resets
▪ Healthier, globally integrated financial systems arise while
avoiding excessive leverage and risk of the past:
– Private sector financing expands, with safety limits
– Eurozone builds institutional framework to allow financial
integration to resume
– Emerging markets accelerate the development of their
capital markets and banking systems
– More stable cross-border flows, as FDI or portfolio equity
and debt make up a greater share
▪ Providing financing for investment without sacrificing safety
and prudence results in more robust economic growth
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Achieving a healthy revival of global financial markets will require policy
actions
1 Complete the current agenda for global regulatory reform
2 Consider the hidden costs of closed door policies
3 Build robust debt and equity capital markets in countries that lack them
4 Create new financing mechanisms for constrained borrowers
5 Promote stable flows of cross-border capital
6 Build more robust monitoring mechanisms
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