capital markets to 2030 - global re-alignment

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Capital markets to 2030: Global re-alignment November 2013 Dr. Paul Kielstra

S1 SPECIAL ISSUE

Capital markets to 2030: Global re-alignment 2

Dear Investor,

Since it’s launch in February 2012, Deutsche Asset &

Wealth Management’s Global Financial Institute (GFI)

has brought professional investors a wealth of insights

into some of the deep economic, financial, and social

themes of our world today and beyond. Its inclusive

research partnerships with some of the world’s most

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institution, length of horizon.

Today, I am proud to introduce you to the “Capital

Markets 2030” series, a collaboration between GFI and

the Economist Intelligence Unit (EIU), aimed at offer-

ing readers an educated look into the global invest-

ment landscape of tomorrow. This series of publica-

tions seeks to answer some of the big questions that

all investors probably ask themselves about the road

ahead. How will demographic shifts impact the capi-

tal markets of developed economies? What is the like-

lihood of our generation experiencing another finan-

cial crisis during its lifetime? What are the biggest

risks and opportunities to be highlighted in emerging

capital markets? How about frontier markets such as


Message from Asoka Wöhrmann

Africa? And, particularly of interest for the wealth manage-

ment sector, what implications do the next two decades

hold for wealth succession?

With the financial crisis now behind us, it is time to look

past the current haze of economic uncertainty to make

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and our portfolios. “Capital Markets 2030” helps you do so

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based in no small measure upon global interviews and sur-

veys of hundreds of C-level executives such as Jim O’Neill,

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pens to be on the board of Global Financial Institute), regu-

lators, and others who will influence the future of capital

markets. All signs point to a major realignment of global

markets in the coming decades. Where will you be, and

where will your money be, when that happens?

With these thoughts in mind, I invite you to take full advan-

tage of the rich and relevant content this series has to offer.

2030 may not be right around the corner, but it is close

enough to affect our financial decisions today.

Happy reading,

Yours truly,

Dr. Asoka Wöhrmann

Co-Chief Investment Officer

Deutsche Asset & Wealth Management

Table of contents3

Table of contents

Executive Summary ............................................................ 05

About the Research ............................................................. 07

1. Introduction: Facing the future positively but

warily ........................................................................................ 09

1.1. Hopeful but guarded ......................................................... 09

1.2. Exploring uncertainties rather than making

predictions ............................................................................ 11

2. Uncertainty I: The future of globalisation ................... 13

3. Uncertainty II: The impact of changing eco-

nomic geography ................................................................ 15

3.1. More money in emerging markets ................................ 15

3.2. The implications ................................................................... 15

4. Uncertainty III: Whither regulation? .............................. 19

4.1. The prospects for regulatory convergence ................ 19

4.2. Getting regulation right .................................................... 20

5. Uncertainty IV: The shape of the market ..................... 21

5.1. Evolving marketplaces ....................................................... 21

5.2. Technological surprises in store? ................................... 22

5.3. A different mix of securities ............................................. 23

5.4. A changing mix of strategies ........................................... 24

5.5. Why sustainability is important for investors ............ 26

6. Uncertainty V: From where will the next crisis

come? ...................................................................................... 27

6.1. Government debt ................................................................ 27

6.2. Inflation ................................................................................... 28

7. Conclusion .............................................................................. 30


Capital markets to 2030: Global re-alignment 4

About the Economist Intelligence Unit

The Economist Intelligence Unit (EIU) is the

world’s leading resource for economic and busi-

ness research, forecasting and analysis. It provides

accurate and impartial intelligence for companies,

government agencies, financial institutions and

academic organisations around the globe, inspir-

ing business leaders to act with confidence since

1946. EIU products include its flagship Country

Reports service, providing political and economic

analysis for 195 countries, and a portfolio of sub-

scription-based data and forecasting services. The

company also undertakes bespoke research and

analysis projects on individual markets and busi-

ness sectors. The EIU is headquartered in London,

UK, with offices in more than 40 cities and a net-

work of some 650 country experts and analysts

worldwide. It operates independently as the busi-

ness-to-business arm of The Economist Group,

the leading source of analysis on international

business and world affairs.

This article was written by Dr. Paul Kielstra and

edited by Brian Gardner.

Dr. Paul Kielstra is a Contributing Editor at the

Economist Intelligence Unit. He has written on

a wide range of topics, from the implications of

political violence for business, through the eco-

nomic costs of diabetes. HIs work has included

a variety of pieces covering the financial services

industry including the changing role relationship

between the risk and finance function in banks,

preparing for the future bank customer, sanctions

compliance in the financial services industry, and

the future of insurance. A published historian, Dr.

Kielstra has degrees in history from the Universi-

ties of Toronto and Oxford, and a graduate diploma

in Economics from the London School of Econom-

ics. He has worked in business, academia, and

the charitable sector.

Brian Gardner is a Senior Editor with the EIU’s

Thought Leadership Team. His work has covered a

breadth of business strategy issues across indus-

tries ranging from energy and information tech-

nology to manufacturing and financial services. In

this role, he provides analysis as well as editing,

project management and the occasional speaking

role. Prior work included leading investigations

into energy systems, governance and regulatory

regimes. Before that he consulted for the Commit-

tee on Global Thought and the Joint US-China Col-

laboration on Clean Energy. He holds a master’s

degree from Columbia University in New York City

and a bachelor’s degree from American University

in Washington, DC. He also contributes to The

Economist Group’s management thinking portal.


Introduction to Global Financial Institute

Global Financial Institute was launched in Novem-

ber 2011. It is a new-concept think tank that seeks

to foster a unique category of thought leadership

for professional and individual investors by effec-

tively and tastefully combining the perspectives of

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& Wealth Management invites you to check the

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white papers, interviews, videos, podcasts, and

more from Deutsche Asset & Wealth Manage-

ment’s Co-Chief Investment Officer of Asset Man-

agement Dr. Asoka Wöhrmann, CIO Office Chief

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the University of Zurich and many more, all made

relevant and reader-friendly for investment profes-

sionals like you.

5

Capital markets link savings and investment, making them

uniquely vital to economic growth. The coming decades

will see a major realignment of global markets but some

surprising continuity as well. As emerging markets become

more important, developed markets will show unexpected

resilience with global investors cautious in the face of

uncertainty. This Economist Intelligence Unit study spon-

sored by Deutsche Asset and Wealth Management takes a

longer view, considering how the world’s capital markets

might evolve to 2030. In so doing, it aims to shed light

both on how the industry expects a range of today’s issues

to play out, as well as – crucially – some of the potential

implications of such developments for tomorrow. It draws

on a detailed survey of 353 senior executives from compa-

nies active in capital markets; in-depth interviews with 16

experts, corporate leaders, and senior executives; as well as

substantial desk research. Its key findings include:

Those involved in capital markets are guardedly optimis-

tic despite the global financial system’s unresolved risks.

Between 60% and 70% of survey respondents expect that

by 2030 global capital markets will have each of greater

depth, efficiency, and liquidity. In every case, only 10% or

fewer foresee deterioration. Investors remain justifiably

concerned, with 65% of survey respondents stating that

increased regulation to capital markets since 2008 has not

addressed underlying risks to the system. Magnus Böcker,

CEO of the Singapore Exchange, reflects the general mood:

“I am very optimistic about what I can see happening and

about what capital markets could do. When I say that,

though, [I am aware that] it will be a bumpy road with its

fair share of up and downturns.”

The stalled globalisation of capital markets is likely to

resume at a slower pace than pre-crisis, but downside risks

remain: Data from the Economist Intelligence Unit and

McKinsey Global Institute show that foreign direct invest-

ment and broader international capital flows remain sig-

nificantly down from pre-2008 levels – in the latter case by

61% in 2012. Most experts eventually expect a resumption

of financial integration, albeit at a slower pace than before.

Similarly, survey respondents predict greater integration

of capital market institutions, although typically at the

regional rather than global level.

Contrary to popular expectations, the United States will

remain the world’s leading financial power. This is despite

a major shift towards the capital markets of emerging

economies. Respondents expect that having substantial

investments in emerging markets will become the norm:

the proportion with under a quarter of assets invested in

these economies is expected to plummet from 60% today

to 24% by 2030. At the same time, those surveyed say that

by then the United States, China, and India will have the

foremost equity markets, and the US, China, and Japan

the most important debt ones. A slim majority (54%) also

expect the American dollar to remain the global reserve

currency through the coming decades.

As the challenge for regulators moves toward implemen-

tation of the large and complex new rules devised since

2008, survey respondents expect informal, regional con-

vergence: Informed observers speak about both the sub-

stantial progress made in devising new regulation since

the Global Financial Crisis and the extensive work that

remains unfinished. Many agree, however, that implemen-

tation is now a major priority. Most survey respondents

believe that the process will lead to regulatory conver-

gence at a regional level rather than a global one and that

this will happen through cooperation or extraterritorial

legislation instead of formal agreements. One perhaps sur-

prising driver of convergence should be the competitive

Capital markets to 2030: Global re-alignment A Global Financial Institute research paper written by the Economist Intelligence UnitNovember 2013

Capital markets to 2030: Global re-alignment Global Financial Institute

Written by

Executive Summary

6 Capital markets to 2030: global re-alignment

advantage for markets that strong regulation is seen to

bring. As Isabelle Vaillaint, director of regulation at the

European Banking Authority, puts it, “Before the crisis,

competition in regulation was toward laxer rules. Now it

is going the other way.” On a darker note, several experts

expressed concern that the current political environment

might lead to irrational regulation harmful to the industry.

Respondents predict that exchanges will be dominated by

regional and global players trading a wider range of securi-

ties than today: As a fixed cost industry, bigger is cheaper

for exchanges, but most respondents foresee the market

being shaped by a mix of regional and global exchanges

for both equity and debt in 2030. This reflects demand:

small and medium sized companies tend to tap local

capital markets and many investors have a home coun-

try bias. Meanwhile, while respondents see off exchange

equity investments becoming more attractive faster than

publicly traded shares, they also foresee growth in inter-

est in exchange traded government and corporate debt.

Robert Greifeld, CEO of NASDAQ-OMX calls this part of a

broader shift. “We see exchanges evolving to include more

and more asset classes,” because of growing regulation on

transparency and the liquidity benefits such markets bring.

Technological surprises are likely according to those sur-

veyed: Sixty-six percent of respondents believe that IT will

create new business models for aggregating capital or link-

ing up counter-parties. Moreover 41% agree that new tech-

nology will make it harder to regulate international capital

transactions, compared to only 23% who disagree. Experts

interviewed for the study, though, are split. Some point to

innovations such as peer-to-peer lending as being poten-

tially very disruptive. Others stress that predictions of

technological disintermediation of financial markets have

been around for years and never come to pass because of

the value intermediaries can bring.

Survey respondents have substantial concerns about gov-

ernment debt and the potential for renewed inflation in

the coming year: Over half believe that government debt

is “very likely to have a debilitating effect” on national

capital markets in all of Germany, France, the United King-

dom, China, India, Brazil and Japan before 2030; more than

three-quarters say the same of the United States. Majori-

ties also expect American and Chinese debts to have such

an impact on international markets. Most experts acknowl-

edge the potential danger of elevated national debt levels

but a number point out that uncertainty over its precise

economic impact means it might prove not to be such a

major problem. Meanwhile, more than four in 10 respon-

dents say that each of US dollar, the Chinese renminbi, and

the euro will see inflation levels which will have a substan-

tial negative effect on international markets by 2030. EIU

projections are much more benign, but any rise in inflation

as economies recover, if not carefully watched, carries the

potential to grow uncontrolled.



The report is based on a survey of 353 senior executives

from companies active in capital markets. Of these, 47%

are asset managers or institutional investors. (These are

roughly evenly divided by size, with 32% managing under

$10 bn in assets, 36% managing between $10 bn and $50

bn, and the rest managing over $50 bn). The remaining

respondents are from companies that provide non-finan-

cial goods and services (32% of the total) and banks or

licensed deposit takers (22%). These latter types of compa-

nies also include a range of sizes, with 57% having annual

incomes of over $500 m, and 26% over $5 bn. The survey

sample is senior, with 57% C-level or above. Respondents

are also distributed globally, with 32% based in the Asia-

Pacific region, 30% in Europe, and 22% in North America,

with the remaining 16% from the rest of the world. In addi-

tion, the EIU conducted 16 in depth interviews with leaders

from stakeholder companies and organisations – including

investment firms, banks, regulatory agencies, exchanges,

and international associations – as well as academic and

other experts as well as substantial desk research.

The Economist Intelligence Unit would like to thank the fol-

lowing participants in the interview programme for their

time and expertise:

Magnus Böcker, CEO, Sinagpore Exchange

Julian Callow, Chief International Economist, Barclays

Stephen Cecchetti, Head of Monetary and Economic

Department, Bank for International Settlements

Ranu Dayal, Senior Partner, Boston Consulting Group, Delhi

Romain Devai, Research Manager, World Federation of

Exchanges

Richard Dobbs, Director, McKinsey Global Institute on Cap-

ital Markets

Bernard Dumas, Professor of Finance, INSEAD

Barry Eichengreen, Professor of Economics and Political

Science, University of California, Berkeley

Thomas Finke, CEO, Babson Capital

Robert Greifeld, CEO, NASDAQ-OMX

Ian Linnell, Global Analytical Head, Fitch Ratings

Jim O’Neill, Retired Chairman, Goldman Sachs Asset

Management

James Poterba, Professor of Economics, Massachusetts

Institute of Technology

Isabelle Vaillant, Director of Regulation, European Banking

Authority

Nigel Vooght, Global Leader, Financial Services,

PricewaterhouseCoopers

David Wright, Secretary-General, International Organisa-

tion of Securities Commissions


About the Research

8 Capital markets to 2030: global re-alignment Global Financial Institute

1%5%

Emerging m

arketscannot be ignored

% of respondents

5

1020

3040

5060

10 15 20 25 30

Current2030

What’s holding back �nancial globalisation

Majorities see im

provements

across a range of issues to 2030

Most im

portant debt m

arkets 2030

US 66%

China 53% India 35%

Japan 24% U

K 22%

The Future of Capital M

arkets

62%concerned

that US

government d

ebt w

ill harm

international m

arkets by 2030

48%52%

Respondents aresplit on w

hethercurrent m

etricsand m

odels are su�

cient to addresssystem

ic risks

69%of respondents believe that IT w

ill create new

business models for

aggregating capital or linking up counter-parties.

35%(has not)

5%

(unsure)

65%(has)

Latin America and Asia (excl Japan)

have already grown to 26%

of global m

arket capitalisation

9%21%

Evolution not revolutionm

arket change to 2030

Most im

portantequity m

arkets2030

68% U

S 45%

China 30%

Japan 28%

UK

26% G

ermany

70

YES38%

UN

SURE

29%

NO

33%%

of assets invested in countriescurrently considered em

erging markets

now and projected to 2030

20122001

Greater dem

and for capital from

emerging m

arketcom

panies andgovernm

ents will drive

up the cost of capital

In�ation is a concern across major currencies

46%agreedisagree

~40% expect in�ation in these currencies

to have a substantial negative e�ect on global capital m

arkets

Dollar

EuroYen

2015

50 6040302010

20202025

20302030

and beyondD

on’t know

Most respondents expect

the US dollar to rem

ain the global reserve currency beyond 2030

21%

$ ¥$

€

Respondent percentages draw

n from a global survey

of 353 senior executives active in capital m

arkets

47% asset m

anagers or institutional investors22%

banks32%

other industries

written by

Greater m

arket depth79%

46%

Top �nancial performers

The rest

Deeper liquidity of capital m

arkets

77%62%


The rest

Increased e�ciency of capital m

arkets73%

54%


The rest

Closer integration of global capital markets65%

53%


The rest

Source: W

orld federation of exchanges

Lack of knowledge

of foreign market

34%H

ome or regional

markets su�

cient for capital needs

39%

of respondents from the developed

world hold this concern

41%

Concerns about rule of law

in some

large foreign markets

34%

but barely a third of respondents think that the underlying issues havebeen addressed by the increased regulation since 2008

A slim

majority

expect market

regulation to be m

ore e�ective by 2030

% of respondents

If money is the lifeblood of the economy, then capital mar-

kets are its essential circulatory system. Their primary role

is simple: “channelling savings to investment” to use the

words of Ranu Dayal, a senior partner in Boston Consult-

ing Group’s Delhi office. The search for ways to do this has,

however, created a complex web of stakeholders, institu-

tions, regulators, and even personal relationships. These

in turn interact on a vast array of financial instruments

ranging from straight-forward equities, through arcane

derivatives, to online negotiated peer-to-peer contracts.

The collective assets within this system are huge. The Inter-

national Monetary Fund’s most recent estimates, for late

2011, put total global equity, debt, and bank assets at just

under $260 trillion, or 369% of world GDP. McKinsey, a con-

sultancy, relying on different data, puts the figure for 2012

at a somewhat lower but still substantial $225 trillion.

When all goes well these capital markets undergird eco-

nomic growth and development. The recent Global Finan-

cial Crisis is a stark reminder, however, of the damage that

occurs when this circulatory system seizes up. As Bernard

Dumas, professor of finance at INSEAD, puts it, “Capital

markets are largely the advance reflection of the economy.”

This study – relying on a survey of 353 senior executives

from companies active in them; in-depth interviews with

16 experts, corporate leaders, and senior officials from


important market institutions; as well as substantial desk

research – considers how these essential markets are likely

to develop. Rather than focussing on immediate chal-

lenges, however, it seeks to take a longer view, considering

ways in which they might evolve between now and 2030.

1.1 Hopeful but guarded

The good news is that, despite the difficult period through

which the financial system has recently passed – and the

issues it continues to navigate – survey respondents are

positive about the long term. Sixty-two percent expect that

by 2030 global capital markets will be deeper, 63% say they

will be more efficient, and 70% predict increased liquidity.

Only small minorities foresee deterioration in these areas.

None of these developments is given. Although depth and

liquidity are difficult to measure at the global level, IMF data

on global assets as a percentage of GDP – a proxy for the

former – have gone up and down with developed world

economies over the last decade rather than heading in any

particular direction (see chart). Similarly, a European Cen-

tral Bank analysis which considered different ways to look

at financial market liquidity found that one measure – the

illiquidity ratio – showed a positive shift in leading devel-

oped and emerging economies between the late 1990s

and 2005. Thereafter, though, it revealed an underlying

22 %

18 %

20 %

41 %

51 %

43 %

30 %

20 %

28 %

6 %

8 %

8 %

1 %

2 %

1 %

1 %

0 %

0 %

Market depth

Liquidity

Efficiency

Increase greatly 1 2 No change 3 4 Decrease greatly 5 Don't know

How do you expect global capital markets overall to change in the following areas by 2030?

1. Introduction: Facing the future positively but warily


stasis punctuated by negative reactions to crises.1

Nevertheless, many are confident that economic growth in

emerging markets and the recovery of developed ones will

eventually improve capital markets. Nigel Vooght – global

leader for Financial Services at the PwC – holds that “There

will be increasing depth, liquidity, and efficiency because

of those issues. The pessimism is about the timing.” Thomas

Finke, CEO of Babson Capital, an investment firm, is also

hopeful thanks to greater openness in emerging markets,

technological advances and even the impact of recent


1 “Global Liquidity: Concepts, measurements and implications from a monetary policy perspective” ECB Monthly Bulletin, October 2012.

Global capital assets as a percentage of GDP

0

100

200

300

400

500

600

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Financial market illiquidity indicator for advanced economies and emerging markets

Notes: Theverticallinescorrespondtotheterroristattackson11.September2001,theLehmancollapseinSeptember2008,andtheitensificationoftheEMUsovereigndebtcrisisinAugust2011.Advancedeconomies:Australie,Canada,France,Germany,Italy,Japan,Spain,UnitedKingdom,UnitedStates.Emergingmarketeconomies:China,India,Indonesia,SouthAfrica,SouthKorea.Latestobservations:July2012Source: DatastreamandECBcalculations

SourceIMF


financial turmoil. “Coming out of this crisis, the lessons

learned will make financial institutions and investors more

aware of risks and more transparent,” he says.

However upbeat, survey respondents also remain guarded.

They see significant potential current dangers: 65% say

that increased regulation to capital markets since 2008

has not addressed underlying risks to the system, and

those surveyed are almost evenly split on whether current

metrics and models are sufficient to address systemic risks

effectively.

Looking at the period between now and 2030, the leading

risk they most frequently mention for those tapping into

global markets is a renewed global economic or financial

crisis (cited by 45%). For investors, the bigger worries are

asset bubbles (45%) as well as financial crises (36%). Some

of this optimism may arise from the long time horizon from

now to 2030. Romain Devai, who leads the research team

at the World Federation of Exchanges, says “We certainly

hope for greater depth, efficiency, liquidity and transpar-

ency, but have serious concerns about the extent that is

really happening at the moment.”

1.2 Exploring uncertainties rather than making predictions

Such uncertainty highlights a requirement of any exami-

nation of how global markets might evolve over time:

the need to avoid hubris. The 17 years between now and

2030 is a long period for markets. If we were looking to

today from the same distance in the past, in 1996, only a

rare analyst could have foreseen any of the Asian financial

crisis, the dot com bubble, and the Global Financial Cri-

sis, let alone all three. For instance, IMF’s key policy issues

report on capital markets that year dwelt on the dangers of


Do you agree or disagree with the following? Please select one for each row

65 %

38 %

30 %

29 %

5 %

33 %

0% 20% 40% 60% 80% 100%

Increased regulation of capital markets in many countries after the 2008 financial crisis has not addressed the underlying risks in the system,

such as substantial global current account imbalances

Current metrics and models are sufficient to effectively address systemic risks (eg, Value at Risk)

Agree Neither agree nor disagree Disagree


foreign exchange risk to systematically important interna-

tional banks.2

Instead of attempting to predict the next asset bubble, this

study will examine key uncertainties confronting capital

markets in the coming decades as they are identified by the

survey respondents and expert interviewees. The analysis

focuses on the growth of emerging markets, the evolution

of regulation, and the way the marketplace – especially

exchanges – will likely develop. This analysis, in turn, will

indicate the likely contours of development of capital mar-

kets over the long term, as well shedding light on the cur-

rent challenges facing capital market stakeholders.


2 International Capital Markets: Developments, Prospects, and Key Policy Issues, 1996.

Which of the following events or circumstances are most likely to be the biggest risks for those

investing in international capital markets between now and 2030? Please select the top three.

Which of the following events or circumstances are likely to be the biggest risks for those companies

accessing capital from international capital markets between now and 2030? Please select up to

three.

44 %

35 %

34 %

33 %

32 %

28 %

19 %

17 %

16 %

14 %

0 %

Global economic/financial crises

Currency volatility

Asset bubbles

Sovereign debt crisis

Political risk/protectionism/capital controls

Regional economic/financial crises

Deflation

Natural disasters

Legal/regulatory risk

Armed conflict

Other, please specify

45 %

36 %

36 %

35 %

31 %

27 %

27 %

25 %

20 %

10 %

1 %

Asset bubbles

Global economic/financial crises

Political risk/protectionism/capital controls

Sovereign debt crisis

Inflation

Regional economic/financial crises

Currency volatility

Armed conflict

Natural disasters

Legal/regulatory risk



For years conventional wisdom considered ever greater

globalisation the inevitable direction of travel for capital

markets. Now, though, notes David Wright, Secretary-

General of the International Organisation of Security

Commissions, “One thing which is becoming less sure is

how global will we be. Is there a retrenchment from what

we were seeing?” DHL’s annual Global Connectedness

Index – which measures the depth and breadth of glo-

balisation – in December 2012 reported ongoing “capital

market fragmentation” which had grown worse since 2008

rather than improving. One heartening aspect of the cri-

sis has been the degree to which countries have resisted

protectionist impulses however, new capital regulations

which the US Federal Reserve are looking to implement on

foreign banks operating in the country may, in the words

of the Economist, have a “chilling effect…on cross-border

banking almost everywhere.” Jim O’Neill – who recently

retired as chairman of Goldman Sachs Asset Management

and coined the term “BRICs” – is less than sanguine. “I think

probably the biggest uncertainty about the future of capi-

tal markets is whether globalisation itself will survive the

challenges since 2008. Frankly it is very hard to tell.” He

notes that, while emerging markets still view the phenom-

enon positively, “Since 2008 many western countries are

full of self-doubt and self-pity. Globalisation is in retreat

and taxpayers resent bailing out their own banks, never

mind ones in other countries.” Financial globalisation and

integration are likely to continue slowly but are no longer

the sure bets they once seemed.

Economic data also point to a slowing – and in Europe a

reversal – of financial integration in recent years. Global

foreign direct investment (FDI) fell by 43% between 2007

and 2009, according to EIU figures. Although there has

been some recovery in absolute terms, as a proportion of

GDP, FDI remains well below the pre-crisis peak [see chart].

McKinsey Global Institute data on broader cross-border

capital flows – including lending, FDI, and foreign portfolio

investment – tells an even more striking story. These flows

– a useful proxy for financial integration – dropped 86%

during the crisis and by 2012 remained 61% below their

2007 peak.

The potential for worse to come certainly exists. Mr O’Neill

notes that globalisation is a function of policy decisions

and the current fashionable hostility to financial institu-

tions could lead to poor policy choices. He adds, “If the

US economy goes into semi-Japanese coma for a long

time,” that country’s government might act in ways which

impede global integration. Another danger, says Richard

Dobbs, director of the McKinsey Global Institute, is that

governments with large debts “may worry about an exit of

capital and bring in closet protection, dressed up as con-

sumer protection, in order to force capital to build up close

to home.”


Global FDI as percentage of GDP

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

SourceEIU

2. Uncertainty I: The future of globalisation


Overall, though, few see the world ready to abandon finan-

cial globalisation wholesale. Mr Dobbs thinks that a more

likely explanation of the data is that “we are back in line

with the long term trend line [of increasing financial inte-

gration] and have blown off the froth” that developed in

the heady days before 2008. In parallel, Julian Callow, chief

international economist, Barclays states, “You could argue

that just before the crisis there was insufficient awareness

of risk, so some of the flows went too far.” The resultant

losses, he adds, have led to some domestication of capital,

but over time, with a better understanding of risk, the pro-

cess should revert.

Just as important is continuing investor interest in foreign

markets. Robert Greifeld, CEO of the NASDAQ-OMX mar-

ket, calls it “important to recognise that first and foremost

investors have become global and can access markets

globally.” Moreover, Mr Finke believes, “investors in the

last five years have been looking to be more international

in their portfolios. That is a process.” In the short term, he

adds, European issues or low returns in some countries

might constrain such activity, but “the desire to diversify

is there. Relative value across different markets will dictate

timing, but the trend isn’t ending.”

Survey data also indicates that respondents see slower

globalisation rather than a reversal. They expect some

internationalisation of various aspects of capital markets

by 2030 including, where people will invest, the nature

of regulation, and the level at which exchanges operate.

These views give a collective impression that respondents

see steady coalescing of markets at a regional – and to

some extent world level – rather than a resumption of the

speedier financial globalisation of the past.

A closer look at the McKinsey data supports this view. Most

of the global drop in capital flows comes from European

banks and other investors there re-domesticating assets

in the face of perceived higher risks within the continent.

By contrast, capital flows to and from emerging markets

have largely recovered their pre-crisis levels. Any apparent

reversal of financial globalisation, then, likely results from

very specific causes limited to a particular geographic area.

Stephen Cecchetti, head of the monetary and economic

department at the Bank for International Settlements says

that “Europe has been a special case where people have

been concerned with matching books within European

countries. Even there, the risks of re-denomination have

receded substantially.”

Globalisation may be limping, but it is far from dead.


Global cross-border capital flows(1) ($ trillion, constant 2011 exchange rates)

1Includesforeigndirectinvestment,purchaseofforeignbondsandequities,andcross-borderloansanddeposits.2Estimatedbasedondatathroughthelatestavailablequarter(Q3formajordevelopedeconomies,Q2forotheradvancedandemergingeco-nomies).Forcountrieswithoutquarterlydata,weusetrendsfromtheInstituteofIntgernatinalFinance.Source: InternationalMonetaryFund(IMF)BalanceofPayments;InstituteofInternationalFinance(IIF);McKinseyGlobalInstituteanalysis


3.1 More money in emerging markets

The dramatic growth of developing economies, nota-

bly those of the Asian giants China and India, have

been reshaping much of the world economy for several

decades. Capital markets are no exception. Mr Vooght

calls today’s “biggest shift in capital markets the one

to emerging markets, particularly the SAAAME (South

America, Africa, Asia and the Middle East) countries.” To

take just one measure, according to the World Federation

of Exchanges (WFE), between 2002 and 2011 the level of

domestic market capitalisation held by Asian exchanges

outside of Japan rose from 9% to 21% of the global total.

The equivalent numbers for Latin America are 1% and 5%.

Increased investment in emerging markets will drive this

trend further. Survey respondents expect their average

assets under management in these countries to rise from

26% currently to 39% by 2030, growth which will come

from investors in all global regions. Even more important

than the average increase will be a shift in what is normal.

Today 60% of respondents say that under a quarter of the

assets they manage are invested in emerging markets.

By 2030, that proportion is expected to decrease to 24%.

Those with a small stake will become the exception.

3. Uncertainty II: The impact of changing economic geography

Mr Finke is already seeing such a shift. Since the economic

crisis began, risk-reward calculations are different, he says.

“The mind-set has changed. Now people worry about bank-

ruptcies in Spain, not Brazil.” In his own company, he adds,

“Before the crisis, we made investments in the Asia Pacific

region on an opportunistic basis. Since then we have focused

on growing our investment operations in Australia and Asia

to complement our long time presence in the US and Europe.

We are intent on being a truly global firm.” Looking ahead,

Magnus Böcker, CEO of the Singapore Exchange, sees sub-

stantial drivers of future growth for capital markets in the

developing world, particularly in Asia. On that continent, “in

under 20 years, 2.5 bn people are coming into the middle

class. We can cater to their needs only if we get resources

to the right places [for economic growth and infrastructure

building]. This is what financial markets are all about. It is an

underestimated challenge.”

3.2 The implications

“The unanswered question,” arising from the growth of these

markets, says Mr Vooght, “is what it means in terms of their

power.” Ian Linnell, global analytical head at Fitch Ratings,

expects “a shift in dynamics and a slow erosion in the impor-

tance of traditional capital markets at expense of new ones.”

WFE figures show that this change too has already begun.

What proportion of the assets you manage are currently invested – as equity or debt instruments – in

countries presently considered emerging markets and what proportiondo you expect in these coun-

tries in 2030?

15 %

6 %

19 %

6 %

26 %

13 %

22 %

20 %

5 %

27 %

3 %

12 %

1 %

4 %

1 %

5 %

2 %

3 %

1 %

1 %

4 %

5 %

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Current

2030

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%


While exchanges in the developed world continue to

dominate in terms of market capitalisation, the organisa-

tion reports that in 2012 the National Stock Exchange of

India had the greatest number of electronic order book

share trades worldwide and the Shanghai and Shenzhen

exchanges saw the fourth and fifth highest levels of trad-

ing by value globally. Between 2009 and 2011, accord-

ing to Dealogic, the latter two were also in the top five

of exchanges for initial public offerings by value, and in

2012 remained in the top 10. Mr Devai says of the Chinese

exchanges in particular “Because of the size of the country,

they are already huge. If they become international, they

will immediately become regional, if not global, actors.”

Those surveyed expect that emerging market exchanges

will solidify their places among the world’s leaders. The

most common choices among respondents for which


Which of the following economies do you think will have the most important public equity mar-

kets for the global economy by 2030? Please select up to three.

Which of the following countries do you think will have the most important bond markets for the

global economy by 2030? Please select up to three.

65 %

53 %

35 %

24 %

22 %

21 %

19 %

8 %

8 %

3 %

5 %

United States

China

India

Japan

United Kingdom

Brazil

Germany

France

Italy


Capital will be so international that location will have little relevance

68 %

45 %

30 %

28 %

26 %

24 %

12 %

10 %

9 %

3 %

4 %

United States

China

Japan

United Kingdom

Germany

India

Brazil

France

Italy


Capital will be so international that location will have little relevance


countries will have the foremost equity markets by 2030

are the United States, China, and India, with roughly the

same number expecting Brazil (21%) and the UK (22%) to

be among the leaders. For debt markets, the most frequent

selections are the United States, China, and Japan (30%).

Rapid institution building will need to undergird this

change. The largest barrier to greater use of global capi-

tal markets by respondents from developed countries is

concern about the rule of law in some markets (41%). More

generally, Mr Dayal sees capacity, especially in the area

of fixed income, as lacking in the capital markets of some

major emerging states, including China. “Markets are still

immature and clearly small relative to GDP,” he says, but

adds that “a lot of institutional changes are in train that

should lead to dramatic improvements.” Pressing demand

will help drive these developments. Survey respondents

in emerging markets are particular likely to see a greater

use of corporate bonds: 37% see them as being among the

most likely investments to grow in attractiveness by 2030.

Mr Böcker explains that the infrastructure requirements of

emerging Asia will require huge capital resources in the

coming decades. “One of the key ways to make it happen is

with well-structured bond markets.”

Less clear than the gain in the relative importance of

emerging capital markets is the influence that economic

development in these countries will have on the global

cost of capital. Here 46% of respondents expect that

greater demand for capital from emerging market com-

panies and governments will drive up the price (just 21%

disagree). Mr Callow describes a growing risk for those who

access capital in developed countries. So far, public sector

investors from every region, and even sovereign wealth

funds, he notes, have often been conservative. They will

likely soon look for better returns in different countries.

“If you think about countries that have tended to focus on

US markets, we must reckon with those diversifying which

may lead to higher interest rates.”

Predicting the extent of any change, though, is compli-

cated because emerging markets will also be sources of

capital. Before 2008, says Mr Cecchetti, “There was some-

thing confusing for a long time – capital flowing from poor

to rich countries. That was odd because return on capital is

higher in low capitalization countries.” He adds that, since

the crisis, the extent of this flow has diminished, but not

disappeared.

Nevertheless, China, the world’s largest developing country


Developed Market

Respondents

Emerging Market Total

Respondents Total

Concerns about rule of law or political interference in some large, foreign markets

41% 23% 34%

Home/regional markets sufficient for needs 39% 39% 39%

Lack of knowledge of foreign markets 33% 29% 31%

Stricter regulations in your own country 31% 34% 32%

Stricter regulations in the receiving country 29% 29% 29%

Home/regional markets provide funds at lower cost

29% 28% 29%

Lack of resources/personnel to operate effectively in foreign capital markets

28% 29% 28%

Home/regional markets have superior legal/regulatory structures

23% 26% 24%


and one seeing substantial growth, remains a net exporter

of capital –something Mr Dobbs calls “a bizarre paradox.”

He expects Chinese savings rates to drop in future, thereby

likely driving up the cost of capital. On the other hand, the

willingness of households in that country to shift from con-

servative bank accounts to equities – another open ques-

tion – might in turn dampen this for some securities. A

bigger question mark for that country, though, will be gov-

ernment policy. The state’s pervasive role in the financial

services sector means that the allocation of capital remains

a largely political choice. Meanwhile, the easy credit the

country has enjoyed as a result of state policies may have

a downside. Both Fitch and Nomura have expressed con-

cerns that rapid credit expansion and an increasingly

active shadow banking system may be precursors to a

financial crisis there.

This illustrates how the capacity of emerging market

capital to help meet increasing global demand will also

depend on institutional developments in these countries,

such as the development of investment or pension funds.

Mr Dayal, says that “The mobilization of savings and find-

ing ways to bring them onto capital markets is no small

challenge. The creation of large, fungible pools of savings

is as important as the gross amount of generated,” in deter-

mining how much capital will cost. Moreover, as Professor

Dumas points out, emerging market investors will be no

happier with poor legal structures than those in developed

countries. “Asian households have a very high savings rate,”

he says. “As household wealth in more and more countries

rises, the proportion of the world population active in

financial markets will increase. But, for that, the quality of

legal and regulatory institutions has to be improved. If not,

capital will be pulled back.”

A final noteworthy aspect of survey respondents’ views

about the future geography of capital markets is the ongo-

ing importance they expect for the United States. Whatever

the growth of emerging economies, American capital mar-

kets are still more likely to be seen as among the leaders of

2030 than those of any other country. Similarly, although a

significant minority (39%) foresee the dollar losing its sta-

tus as the global reserve currency by 2030, most (54%) see

it retaining its place. This partly arises from a lack of obvi-

ous successor. The Euro certainly is not ready for the role

and the renminbi is not a freely traded currency.

As with globalisation overall, then, the shifting geography

of capital markets should bring a combination of stability

and change rather than a wholesale transformation.



“The biggest [current uncertainty facing capital markets]

has got to be regulation. The market doesn’t know where

that is going to end up,” says Mr Vooght.

His view is understandable. Regulation has long been a

defining element of capital markets but, in response to the

crisis, the world has seen a wave of changes with the Basel III

framework, America’s Dodd-Frank legislation, and Europe’s

Capital Requirements Regulation and Directive (CRR and

CRD IV) only the most prominent examples. Despite the

extensive work done, progress can be described in dif-

ferent ways. Isabelle Vaillant, director of regulation at the

European Banking Authority, stresses that “the [regula-

tory reform] programme of the G20 since 2008 has been

more or less covered.” Mr Wright, on the other hand, points

to the “long way to go” in areas such as shadow banking,

derivatives regulation, and even removing ambiguity from

resolution mechanisms. Both are correct. As Mr Cecchetti

puts it, “quite a bit has been accomplished, but we are not

yet in a position where we believe the current structure is

the final answer.” For survey participants, the glass is half

empty rather than half full. As noted fully, 65% say that

increased regulation has left the underlying issues of 2008

unaddressed.

Looking ahead, Ms Vaillant and Mr Wright agree with many

other interviewees that a priority now needs to be effective

implementation – both domestically and internationally –

of the substantial body of newly devised rules. This will be

no mean feat for in many cases highly complex regulation

– the latest edition of Basel III contains 509 pages and 78

calculus equations. The way this occurs will do much to

shape capital markets over the coming decade.

4.1 The prospects for regulatory convergence

A key issue in this implementation will be the degree

to which investors and companies will be dealing with

broadly similar regulatory regimes worldwide or highly

fragmented ones. The importance of this issue will only

grow as the number of countries hosting major markets

increases. Mr Devai explains that “as capital markets have

become global, there is a need for co-ordinated global

effort but regulations are national. There is a danger of reg-

ulatory arbitrage.” At the moment, says Mr Wright, “there

is no enforcement at the global level of the standards we

purport to agree to. We have only the soft tool box, which

is transparency, monitoring, peer pressure, and prayer.”

Survey respondents are split on the prospects for


13%

24%

30%

30%

31%

46%

0 10 20 30 40 50 60 70 80 90 100

A variety of regionally or globally consolidated markets whichdifferentiate themselves by providing

different levels of regulation/risk

A handful of exchanges consolidated atthe global level dominate the market

Mostly national exchanges dominate the market, althoughsome have multi-national or regional aspirations

A variety of regionally or globally consolidated marketswhich focus on different industrial or sectoral niches

Regionally-consolidated exchanges dominate themarket, although some have global aspirations

A mix of regional and globallyconsolidated exchanges dominate the market

Which of the following statements best describes how you see regulation of international equity and

debt markets evolving over the long term?

18 %

18 %

15 %

12 %

11 %

11 %

1 %

There will be regional convergence through cooperation between regulatory authorities

Extraterritorial regulation by different authorities will lead to de facto convergence around best practice and

difficulties where regulations contradict

There will be global convergence through cooperation between major regulatory authorities

Regulatory regimes will differ even more as countries use them to influence international capital flows

There will be formal global convergence governed by a common international organisation, analogous to the

World Trade Organisation for trade

There will be regional convergence governed by formal regional organisations


4. Uncertainty III: Whither regulation?


international convergence. Most believe it will occur at a

regional level rather than a global one and that it will hap-

pen through cooperation or extraterritorial legislation

rather than formal agreements. Twenty-six percent, on the

other hand, believe that the future holds little change in

this area, or even fragmentation.

They have reason to be unsure. Major regulatory bodies

engage in substantial dialogue, but important theoretical

differences can impede progress. Mr Wright notes that the

United States focuses on the details of legislation when

deciding if other countries’ regulation is equivalent, while

Europe looks at outcomes. Politics are also never far away.

Ms Vaillant explains, for example, that coming to an agree-

ment on a resolution regime “is easy when you are not a

government in charge of public finances and when you

don’t have responsibility for financing a backstop regime,”

but that issues of who will pay when things go wrong inev-

itably bring complications.

One possible driver of convergence in the post-crisis world,

on the other hand, will be a growing sense that strong

regulation, rather than being a hindrance, provides a com-

petitive advantage for markets operating in a given juris-

diction. Ms Vaillant notes that, “During the decade before

the crisis, competition in regulation was toward laxer rules.

Now it is going the other way: if you are claiming that you

are a stronger regulator, now your banks will attract more

capital.” Mr Böcker adds “There will always be a flight to

[regulatory] quality. Over time there always is.”

Survey respondents see the value of strong regulation, but

are less sure that it will drive change everywhere. Fifty-four

percent agree that the strictness of regulatory regimes will

remain a substantial competitive advantage for capital

markets in developed countries for many years to come.

Only 10% dissent. Several interviewees, though, think this

inaccurately reflects developing market conditions. Mr

Dayal takes the finding “with a huge dose of salt. In sev-

eral emerging markets, the regulators are quite studious

and very focussed on getting the best regulation in place.”

Looking at the situation from Europe, Ms Vaillant has a sim-

ilar view: “In emerging markets we see that they are willing

and can pay the price of being very demanding on their

banks. Convergence in the regulatory framework is tak-

ing place.” Mr Böcker believes that competition will drive

progress further: “If you are a newer market, you need to

be even tougher when it comes to openness, transparency,

and building trust.”

4.2 Getting regulation right

The benefits of convergence depend on having good regu-

lation in the first place. Here, the environment of the last

few years has left many uneasy. Mr Dobbs says that “the

biggest risk that we have is misregulation that gets dressed

up as a reaction to the crisis.” Mr Linnell adds, “While clearly

needing reform, the financial services industry is an easy

target [of blame] for the financial crisis and a lot of the

noise that you hear in the regulatory debate is often driven

not by regulators but by politicians. That doesn’t necessar-

ily make the best regulation long-term.” Mr Vooght agrees

that politics, rather than dispassionate analysis, seems to

have the upper hand. “There are no votes in reducing regu-

lation at the moment,” he says. “I would love to be able to

tell you that somebody is going to say ‘let’s work out what

we need,’ but I don’t see that happening.” Instead, layers of

excessive regulation are a real threat.

Despite clear difficulties, over half (52%) the respondents

believe that market regulation will be more effective by

2030 and only 15% think it will be less so. This may be

because, as Mr Callow puts it, “the issue of regulation is

one where the same topics get revisited every decade or

so.” Should things go wrong, adds Mr Linnell, “in 10 years’

time we may be looking at whether the pendulum swung

too far and resulted in serious unintended consequences.”

Regulations tend to move cyclically, trying to prevent the

last crisis but struggling to get ahead of the next crisis as

yet unforeseen. This should be the heart of financial ser-

vices and compliance is no substitute for effective risk

management.



5.1 Evolving marketplaces

The institutions which support capital markets have

changed dramatically in the last two decades: in the mid-

1990s exchanges were wrestling with the implications of

electronic trading, while international mergers were some

years in the future. Looking to 2030, globalisation, evolving

market demands, and new technology will, in Mr Finke’s

5. Uncertainty IV: The shape of the marketwords, “continually cause markets and [investment] firms

like ours to innovate and result in new markets emerging.”

Inevitably, the specific direction of evolution is less clear.

Survey respondents see the trend toward internation-

alisation continuing: 60% expect markets to become

more integrated. These institutions, however, will not be


Which of the following statements describes the most likely trend for debt exchanges by 2030?

Please select all that apply.

Which of the following statements describes the most likely trend for equity exchanges by 2030?

Please select all that apply.

54 %

35 %

29 %

27 %

22 %

19 %

A mix of regional and globally consolidated exchanges dominate the market

Regionally-consolidated exchanges dominate the market, although some have global aspirations

Mostly national exchanges dominate the market, although some have multi-national or regional

aspirations

A variety of regionally or globally consolidated markets which focus on different industrial or sectoral niches

A variety of regionally or globally consolidated markets which differentiate themselves by providing different

levels of regulation/risk

A handful of exchanges consolidated at the global level dominate the market

46 %

31 %

30 %

30 %

24 %

13 %

A mix of regional and globally consolidated exchanges dominate the market

Regionally-consolidated exchanges dominate the market, although some have global aspirations

A variety of regionally or globally consolidated markets which focus on different industrial or sectoral niches

Mostly national exchanges dominate the market, although some have multi-national or regional

aspirations

A handful of exchanges consolidated at the global level dominate the market

A variety of regionally or globally consolidated markets which differentiate themselves by providing different

levels of regulation/risk


predominantly global. Only 4%-5% of respondents believe

that markets will be so international that their location

will not matter. Instead, most expect a mix of regional and

global exchanges for both equity and debt.

Certain factors favour the creation of global market insti-

tutions. Mr Devai notes that exchanges are “a fixed cost

industry where a lot is based on IT platforms. At least on

paper, there is a clear rationale for regional or global merg-

ers and already you have a few global players.” Moreover,

existing information technology is more than capable of

supporting highly global markets. Mr Greifeld explains that

“In NASDAQ-OMX’s data centre for US equities, we have

the ability to process every equity trade on the planet,

probably two times over. The capacity is built, but we

don’t believe this will be a consolidation point.” Instead, he

adds, despite recent sometimes prominent mergers, more

places to trade exist now than did five years ago. “There is

an expanding universe of competitors.”

One reason for the lack of concentration, notes Mr Greif-

eld, is that accounting rules and national regulations dif-

ferentiate markets. “A second, dominant factor is that both

companies and trading members tend to relate to markets

on local basis.” Mr Böcker agrees. Some global and interna-

tional markets will arise, but small enterprises and investors

will never disappear. The former “use local capital markets

for growth and expansion and [the latter] have a tendency

to invest locally. That will continue to be the case.” Survey

data supports this view. The most cited barrier to greater

globalisation of capital markets is that home and regional

ones are sufficient for their requirements (39%).

Even this degree of internationalisation will have knock

on effects on other capital market institutions. Regulation

is discussed above. Mr Linnell notes that the more inter-

national markets develop, the more investors will need

to understand the risks involved with securities issued

by potentially unfamiliar companies and institutions. He

therefore expects demand for rating agency services to

increase. To perform this task effectively, the major agen-

cies will need to continue with efforts regain the confi-

dence which was damaged as a result of the financial cri-

sis. Mr Linnell believes that, driven by both regulation and

the need to improve their standing, ratings agencies have

been “redoubling their efforts. We are seeing increased

transparency [across the industry], more effort going into

explaining rating actions, criteria and models – including

greater opportunity to critique them – strengthened inter-

nal procedures and controls, and more investment in staff

and better systems.” He also notes a greater willingness of

agencies to critique each other’s work. “It is refreshing,” he

concludes, “and gives investors different viewpoints.”

5.2 Technological surprises in store?

Although market demand, rather than technological

determinism, will dictate the shape of markets, technol-

ogy has a way of bringing disruptive change by meeting

unserved or as yet unrecognized market needs. If anything,

respondents expect some surprises along these lines: 66%

believe that IT will create new business models for aggre-

gating capital or linking up counter-parties.

Interviewees, on the other hand, disagree on what the

impact might be. Mr Vooght notes that currently technol-

ogy is changing markets in a variety of ways, with disinter-

mediated peer-to-peer lending being a leading example.

“Technology allows these things to happen but in a way

the market doesn’t understand. The consequences will be

huge and are cross border. In five years, financial services

will not look like today as a result.” The big question, he

adds, then becomes how to regulate such developments

to protect market stakeholders but not stifle innovation.

Respondents expect authorities to struggle with this issue.

Forty one percent agree that new technology will make it

harder to regulate international capital transactions, nearly

twice as many as disagree (23%).

Mr Devai, in contrast, sees less likelihood of rapid technol-

ogy-driven change disrupting existing institutions. “Disin-

termediation has been talked about for years, but hasn’t

happened yet. The technology might allow it, but there

are still huge issues in terms of market surveillance, mar-

ket resilience, market integrity,” and market liquidity. Mr

Böcker adds that disintermediation has never occurred on

the scale predicted because middlemen provide signifi-

cant value that is especially important in international mar-

kets. “The ones who benefit most [from these conditions]

are those who deliver trust, transparency and openness.”

Mr Greifeld agrees: exchanges offer “not just technology



but adequate liquidity as well as buying and selling inter-

est across a wide range. Especially as you get into assets

that don’t trade as frequently, you have a stronger require-

ment for intermediation.”

5.3 A different mix of securities

The securities traded within – or outside – capital market-

places are also likely to evolve in the coming years. Here

survey data give contrasting pictures for equities and

other types of assets. The investment classes which survey

respondents say are most likely to grow in popularity by

2030 are equity in privately held companies (38%), and the

third highest is private equity (34%), both of which trade

away from exchanges. Just 25% predict interest in the

equity of publicly listed companies to increase. Others are

sceptical of such a long term shift toward non-exchange

equity. That such a change is likely “is certainly a popular

view now,” says Mr O’Neill, “partly due to problems of the

past and compliance requirements, but I’m not sure it will

persist. It will depend on markets: a 10 year rally would

change it.”


When considering where to invest the assets you manage, what asset classes do you expect will

become more attractive between now and 2030? Please select top three.

38 %

37 %

34 %

29 %

28 %

27 %

27 %

25 %

17 %

16 %

7 %

0 %

Equity in privately held companies

Real estate

Private equity

Government debt

Specialised investment funds

Corporate debt through bond markets

Hedge funds

Equity in public companies

Commodities

Corporate debt through loan agreements (held either directly or as part of a group)

Options/Futures



Away from equities, things are rather different. Mr Greif-

eld says that “We see exchanges evolving to include more

and more asset classes. In the post-2008 environment,

more products will be traded in a transparent, open access

fashion.”

In our survey this is particularly notable on debt securi-

ties. Government debt (29%) and corporate debt sold

through bond markets (27%) are the publicly traded secu-

rities which respondents most expect to rise in popular-

ity. The latter in particular look set to grow in importance

relative to bank loans as a means of companies financing

themselves. Forty-seven percent of those surveyed foresee

alternative lending to corporations dwarfing bank loans by

2030, compared to just 17% who disagree.

The trend is not new. In recent years, with banks increas-

ingly reluctant to lend, it has accelerated rapidly: as the

chart shows non-financial corporate bond liability in the

United States has been rising exponentially. Corporate

bond issuance has been reaching new heights in much of

the world and, again for non-financial corporations, in 21

of the 38 countries for which the Bank of International Set-

tlements has data, debt securities are at record levels and

a further seven are within 5% of the highest figure as well.

While this activity has raised fears of a bubble in the

short term, over the longer one conditions point toward

a greater use of corporate paper to replace of loans. Mr

Wright explains that “the intellectual writing is toward

higher capital [requirements for banks than in the past].

Market based financing will therefore take on a hugely new

and important role.” Mr Callow sees such a development as

a matter of straightforward economics. “Historically banks

have been the main source of financing, but if you are rais-

ing the relative cost of bank loans [through higher capital

requirements], this will shift the supply of bank credit.” On

the other hand, Professor Dumas points out, this practice

has limits: “Except for very large firms, bank loans are more

efficient than bonds because someone must do the screen-

ing of borrowers and must monitor their actions. These are

the roles of commercial banks. There is no sense in each

and every bond investor performing that role.”

5.4 A changing mix of strategies

The survey data also reveal a shift in how capital market

actors, in particular institutions, will approach investment.

The asset allocation strategy which respondents expect

to grow most in attractiveness between now and 2030

is active management (cited by 55%). This comes as no


Nonfinancial Corporate Business; Corporate Bonds; Liability (CBLBSNNCB) in the US

Shaded areas indicate US recessions. 2013 reaearch.stlouisfed.org

5,000

4,000

3,000

2,000

1,000

0

1940 1950 1960 1970 1980 1990 2000 2010 2020

Bill

ions

of D

olla

rs

-1,000

Source: BoardofGovenorsoftheFederalReserveSystem


surprise, given the level of uncertainty expected in the

coming years.

More striking is the extent to which passive investment

strategies also seem set to grow more popular. Twenty-

nine percent of respondents predict that index tracking

will be among those approaches to asset management

seeing the greatest increase and 21% say the same of pas-

sive ETF-led strategies by 21%. In total, 41% named at least

one of these. Respondents from institutional investors

in particular expect these approaches to become more

popular: 56% cited at least one passive strategy, nearly as

many as expected active management to grow more pop-

ular (60%). This is consistent with other research. Annual

surveys over the last four years by Greenwich Associates,

a research consultancy, have shown increased interest in

ETFs, so that by 2013 18% of institutional investors in the

United States are using them.

The expected continued growth in popularity of passive

strategies does not invariably mean an abandonment of

active ones: 26% of all institutional investors expect active

and passive strategies to simultaneously be among those

which grow attractive most quickly. Instead, passive strat-

egies appear to be filling a specific role. The most recent

Greenwich Associates study, for example, found that inves-

tors tend to use them to provide passive exposure to cer-

tain asset classes in their core portfolios and to provide

greater liquidity. In other words, active managers are look-

ing at combining both traditional securities and passive

tools in the years ahead.


Institutional investors Banks Other Total Actively managed 60% 57% 46% 55% At least one passive strategy 56% 39% 23% 42% Growth focused 29% 34% 57% 39% Balanced 41% 43% 33% 39% Index tracking 41% 28% 13% 29% Absolute return 25% 25% 21% 24% Passive investment (ETF led) 27% 17% 14% 21% Income driven 15% 24% 24% 20% Unconstrained 25% 7% 9% 16% Alternative asset focused 9% 24% 17% 15% Systematic/Rule-based 10% 17% 13% 12% Momentum based 15% 11% 4% 10% Other, please specify 0% 1% 1% 1%


3 Robert G. Eccles et al., “The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance”, Harvard Business School Working Paper 12-035, May 2012.


Over-optimism about the rise of sustainability, however,

can cloud assessments in this field. For example, 60% of

respondents, and 77% of those with the best financial

results, agree that “Integrated reporting is a strong indi-

cator of a company’s resilience and the ability to deliver

long term returns.” Only 10% demur. However, integrated

reporting – the provision of financial and other relevant

data, particularly ESG information in a coherent whole – is

still at a very early, conceptual stage. Only in the last year or

two have pilot programmes been taking place to produce

such reports, and the International Integrated Reporting

Council is still drafting a globally acceptable framework for

the practice. The survey result may represent a statement

of belief about the future rather than current reality.

Ultimately, however, the actual results—not just the per-

ceptions—will prove decisive. Jim O’Neill, recently retired

chairman of Goldman Sachs Asset Management, notes

that “Investors are trying to give more attention to sustain-

ability but relative to risk and return, it is tough to have

huge influence. When an investor demonstrates that pay-

ing attention improves the return and risk profile, then

many will follow.”

The signs are currently that this will eventually happen.

Although the extent to which good ESG performance cor-

relates with financial results is an old debate which has

stubbornly resisted resolution, recent research suggests

a link. A 2012 Harvard Business School study found that,

over the long term, companies which adopt strong envi-

ronmental and policies outperformed those which do not

on share price, return on equity, and return on assets.3

Just as important is that sustainability is consistent with a

growing corporate understanding of resources constraints.

Mr Vooght points to the increasing tendency, especially of

emerging market countries, to buy the land which pro-

duces resources, be it fuel, food or water. “You are now

seeing significant investment in infrastructure and land to

secure resources for populations.” Companies with appro-

priate ESG policies will be the ones which can adjust to this

reality.

Mainstream investors are taking sustainability seriously. If

it continues to deliver good returns, they will stick with it.

5.5 Why sustainability is important for investors

Financial markets not only allocate capital. They can,

through both regulation and collective investor action,

transmit ethical and social norms and expectations.

Accordingly, the last few decades have seen a rise in the

profile of advocates of the explicit consideration of moral

choices – most often environmental or social – as part of

making investment decisions.

The highest profile example of this behaviour has been

Socially Responsible Investment (SRI), which has devel-

oped into an established niche in capital markets. Measur-

ing its size is difficult, as definitions and SRI strategies vary.

Some practices, though, have become very widespread:

Eurosif – the European membership organisation for pro-

fessional investors in this field – reported in 2012 that

nearly half of money overseen by European asset manag-

ers formally excluded from potential investment any com-

panies that produced munitions banned by international

treaties. More generally, according to US SIF, between 2007

and 2011, the amount held by individuals, institutions,

investment companies, or money managers in the United

States using SRI strategies rose from $2.7 trillion to $3.7

trillion.

Despite such growth, however, explicit SRI investment

remains a minority activity. The rapid rise in the US SIF fig-

ure, for example, mirrored that of the investment industry

as a whole: in both years, the numbers represented roughly

11% of all assets under management.

More significant is the attention which the mainstream

investment community is paying to environmental, social,

and corporate governance (ESG) in making its decisions.

In our survey, 53% of respondents say that these issues

receive the full oversight of at least one board member,

and most of the rest are uncertain if they do. More striking

is how far leading companies are ahead on this: 68% of

those who benchmark their companies well above average

at financial performance have at least one board member

focussed on the issue, compared to 47% of those which

are average or below. Nigel Vooght, global leader Finan-

cial Services at PwC, explains that addressing this issue has

become the norm. “People are far more concerned that

their investments are going into ethical and environmental

companies. That is the given. It is what people already do.”


One of the safest predictions about capital markets at any

time is that another crisis will occur, but anticipating its

cause is often futile. Therefore we assess major underlying

concerns rather than trying to pinpoint the next bubble.

6.1 Government debt

As a benchmark for other business risks, government debt

currently has a high profile. Mr Callow expects that rather

than arising in the private sector, “the next crisis, whenever

it is, will more likely be about public debt and how cen-

tral banks are monetizing it.” Respondents have substantial

disquiet about this issue. Over half of respondents believe

that government debt is very likely to have a debilitating

effect on national capital markets in all of Germany, France,

the United Kingdom, China, India, Brazil and Japan before

2030 and 76% say the same of the United States. Majorities

also believe that American (62%) and even Chinese (52%)

debts are very likely to have such a negative impact on

international markets in the same time period.

Interviewees, by contrast, are less certain over how gov-

ernment liabilities will affect capital markets. The risks from

this borrowing certainly exist. Mr Linnell says that already

current “levels of debt are flooding the world with govern-

ment securities. That has a crowding out effect for some

sectors.” Moreover, weakened finances leave them less able

to respond to any future crisis. “That is a worrying devel-

opment,” he concludes. Looking ahead, Mr Dobbs points

to demographic change driving greater spending in many

countries, even before some have to deal with “50% youth

unemployment and need to do something. Government

deficits are going to increase. That will be a big suck of

capital out of global markets.” Similarly, Mr Cecchetti says

that the Bank of International Settlements “is very con-

cerned about the sustainability of government debt in the

advanced world. Governments have made promises to

populations. Where are they going to get the funds to do

this? At some point there has got to be some kind of limit.”

Other experts, though, point to the difficulty in knowing


Is the level of national government debt in any of the following countries very likely to have a debilitat-

ing effect capital markets by 2030? – National capital markets

77 %

59 %

57 %

56 %

55 %

54 %

52 %

50 %

49 %

United States

India

United Kingdom

China

France

Japan

Germany

Brazil

Russia

6. Uncertainty V: From where will the next crisis come?


how much debt governments can carry. Mr O’Neill agrees

that a sovereign wealth crisis is a plausible scenario but

thinks it far from certain. “The world has gone through

periods where this would seem to be possible so many

times and it has not happened. The big story could be

how quickly debt becomes not so big a concern in those

countries which manage to grow.” Mr Vooght adds that

fortuitous developments might ameliorate the risk. For

example, he asks, “Will America be able to pay back debt

because of shale gas revenues?” Even if the current debt

trajectory persists, he says “No one knows what a sustain-

able level of government debt is.” Academic research pro-

vides less clarity here than it once seemed to. In particu-

lar, the recent public controversy over the implications of

errors in the influential writings of Carmen Reinhart and

Kenneth Rogoff have left little clear except that, while a

correlation exists between higher levels of government

debt and lower growth, no number signals a dangerous

point of no return.

6.2 Inflation

Another long term worry many survey respondents share

is the possible impact of inflation on capital markets: 44%

expect that inflation of America’s and China’s currencies

will have substantial negative effect on international mar-

kets; 42% say the same about the euro. More generally,

only 4% believe that no currency will suffer from inflation

to such an extent as to substantially harm global capital

markets before 2030.

EIU predictions are more sanguine. Forecasts for Chinese

inflation up to 2030 never top 4.2% in any given year and in

most are between 2% and 3.5%. For the United States the

figures are between 1.9% and 2.5% for the entire period.

More generally, in no major economy does the projected

annual inflation rate ever rise above 10% before 2030.

The danger is that, even if the risks are low, inflation has

a strong capacity to become unstable when not kept in


Is the level of national government debt in any of the following countries very likely to have a debilitat-

ing effect capital markets by 2030? – International capital markets

62 %

52 %

39 %

37 %

35 %

30 %

28 %

24 %

24 %

United States

China

Japan

India

United Kingdom

France

Germany

Russia

Brazil


check. It will be a battle central bankers need to fight. As

Mr Callow points out, “It is very likely we will get more infla-

tion because central banks desire it. We must also expect

the current output gap and labour market slack will go at

some stage over a five- to 10-year horizon. Inflation is com-

ing back. Will it be slightly higher or unstable? That is the

uncertainty.”

In retrospect, the causes of the next crisis will seem all

too obvious. Their importance to the evolution of capital

markets will be substantial as participants and regulators

seek to avoid a repeat of what will have occurred. For now,

though, here in particular we see through a glass, darkly.


For which of the following currencies, if any, do you expect that inflation is likely to have a substantial

negative effect on international capital markets between now and 2030? Please select all that apply.

44 %

44 %

42 %

35 %

25 %

25 %

23 %

20 %

13 %

6 %

5 %

United States Dollar

Chinese Renminbi

European Euro

Indian Rupee

Brazilian Real

Japanese Yen

Russian Ruble

British Pound

Swiss Franc

Canadian Dollar

None


This review of the major uncertainties facing capital mar-

kets from now until 2030 can be made to point to a com-

forting, if not particularly dramatic, picture of change

amid continuity rather than complete transformation.

These markets look set to resume a steady level of increas-

ing financial integration and internationalisation – if not

outright globalisation – even as they accommodate new

stakeholders and institutions from emerging economies.

Regulators will push on with finishing the work begun

in the wake of the financial crisis and likely find arrange-

ments, one way or another, that are broadly similar world-

wide. Exchanges will become more international but local

players will continue to have an important role, even as all

of these institutions allow for the more transparent sale of

an ever wider array of asset classes. Finally, stakeholders

will keep an eye on government debt and inflation which

lend themselves to greater uncertainty.

This conventional wisdom has an importance beyond the

possibility – given the reasonableness of its underlying

assumptions in current conditions – that it will come to

pass. What people believe about expected risk and return

will affect how they invest and in turn shape market reality.

This could create a self-fulfilling prophecy.

If, though, the most common expectations turn out to

be mistaken, such group behaviour could create a huge

resource misallocation. If history is any guide almost cer-

tainly nowhere near all of the broadly expected future will

occur. Stakeholders need to be prepared for the range of

possibilities to which current uncertainties point: a retreat

from globalisation in the face of ongoing economic mal-

aise; emerging markets driving up capital costs as they

seek to finance their rapid development; fragmented

regulation used as a protectionist tool; disintermediation

disrupting existing markets as new entrants find ways to

provide the sufficient trust for peer to peer trading securi-

ties that eBay did for second hand goods; a currency crisis

leaving the credit ratings of select sovereigns in tatters; or

shale gas letting America grow out of its debt.

The inability to see the future is not a failure. Rather than

trying to provide an inevitably flawed prediction this piece

seeks to help those involved understand the context in

which they make decisions because ultimately, the world

will have the capital markets that it deserves. Rather than

the product of nameless forces, these markets are the end

result of innumerable stakeholder choices which will map

out the journey for the next 17 years. Whatever else, it will

be quite a ride.


7. Conclusion


Table Summary

2013 Expected for 2030

Top three most important equity markets*

1st United States 2nd Japan 3rd United Kingdom

1st United States 2nd China 3rd India

Top three most important global debt markets

1st United States 2nd Japan 3rd France

1st United States 2nd China 3rd Japan

Percent investing >40% of assets in currently emerging markets 18% of survey respondents 56% of survey respondents

Respondent expectations To 2030

Sources of capital growing in importance 1st Insurance companies 2nd Hedge funds 3rd Sovereign wealth funds

Asset classes increasing in attractiveness 1st Equity in privately held companies 2nd Real estate 3rd Private equity funds

Allocation strategies becoming more attractive 1st Actively managed 2nd Growth focused 3rd Balanced

Leading risks for investors in capital markets 1st Asset bubbles 2nd Global economic crises 3rd Political risks

Leading risks for those accessing capital markets 1st Global economic crises 2nd Currency volatility 3rd Asset bubbles

Respondents expect improvement in capital markets across a range of factors By 2030

Market depth 62%

Liquidity 70%

Efficiency 63%

Integration 60%

Regulatory effectiveness 52%

* Note: This is considering Hong Kong separately from mainland China

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