Emerging markets will double their share of global capital markets by 2030, with China taking over as the world’s second largest equity market, and emerging markets generating a much greater share of global underwriting business, according to a new report from the Credit Suisse Research Institute.
The report says that the emerging markets remain underdeveloped within the global capital markets, but that this will change in coming years. While emerging market economies currently account for a 39% share of global output, or 51% based on purchasing power parity, they only represent 22% of global equity market capitalization, and 14% of the global corporate and sovereign bond markets, it notes. However, it forecasts that by 2030, their share of global equity market capitalization will increase to 39%. And, for corporate bonds and sovereign bonds their share is expected to grow to 36% and 27%, respectively.
“The disparity between developed and emerging nations in the global capital market universe will close by 2030,” says Stefano Natella, global head of equity research, investment banking, at Credit Suisse in New York. “This should be driven by a disproportionately large contribution from emerging market equity and corporate bond supply and demand driven by growth in domestic mutual, pension and insurance funds, given the relatively high savings ratios prevalent among emerging economies.”
Credit Suisse forecasts that the greatest compound annual growth rate in market value of any asset class between now and 2030 will be emerging market equities and corporate bonds at 13%, followed by emerging market sovereign bonds at 8%. This is projected to double the growth pace of the developed markets. It is forecasting growth in developed market equities, corporate and sovereign bonds of 7%, 5%, and 3%, respectively.
“In this study, we extrapolate established historical patterns of growth in emerging and developed capital markets to assist in projecting their absolute and relative dimension and composition of market value by the year 2030,” explains Alexander Redman, global emerging markets equity strategist, investment banking at Credit Suisse in London. “We find a strong relationship between the historical expansion of developed nation aggregate equity and corporate bond market value relative to GDP and gains in economic productivity. Thus, we used long-term projections of per capita GDP to make forecasts for both emerging and developed market equity and fixed income issuance over the 17 years to 2030.”
Given the expected growth in emerging markets, Credit Suisse forecasts that emerging countries will generate more underwriting fees, and will also capture a bigger share of the pie. According to the report, total capital markets underwriting fees globally for the period from 2014 to 2030 will more than double to US$638 billion in nominal terms, compared to the US$307 billion in fees earned in the period 2000 to 2014. And, 40% of these fees (US$256 billion) is expected to be generated from emerging markets, compared with 16% since 2000.
The report also says that the split between equity and debt capital market underwriting fees will be split about evenly between now and 2030, compared with the two-thirds equity, one-third debt split recorded from 2000 to 2013.
Within the emerging markets, the report says it expects the BRICs to increase their share of the global equities universe to 26% by the end of 2030, up from 11% in 2014; representing 66% of emerging market equity market capitalization, up from 52% in 2014, and 21% in 1996.
It also predicts that China’s equity market will overtake the UK and Japan by 2030 to sit as the second largest equity market. While the U.S. will remain the largest equity market in 2030 with a forecast market cap of US$98 trillion and a 35% market share, it sees China reaching a market cap of a US$54 trillion and a 19% share. The forecast is based on the assumption that China’s capital account liberalizes giving foreign investors access to its A-share market.
It also forecasts that China’s dominance of emerging corporate bond markets will persist, rising from the current 37% share of total emerging market activity to a 53% share by 2030. And, it says that China will also see the largest growth in corporate bond market value by 2030, with total issuance originating from China projected to increase by nearly tenfold from US$3 trillion in 2014 to US$32 trillion by 2030.
Additionally, the report suggests that Saudi Arabia, Indonesia and Turkey “will undergo a meaningful change in their relative size rankings” within the emerging markets, with Saudi Arabia rising to the sixth largest market from 10th, Indonesia rising to seventh from 12th, and Turkey jumping to 10th largest from 17th. Turkey, China and Indonesia are seen enjoying the highest compound annual growth rate for equity capitalization between 2014 and 2030.