The gap between emerging market and developed market shares of global GDP has shrunk remarkably over the last ten years, but emerging market share of capital markets has lagged and even fallen in recent years as investors have taken advantage of low valuations and a post-crisis bull market in the US and Europe. As EM first return to trend and then start catching up again, Credit Suisse head of research and deputy global CIO Giles Keating and head of global equity research – investment banking Stefano Natella argue that EM capital markets will balloon between now and 2030.
“Emerging nation capital markets remain underdeveloped relative to the size of their economies, despite rapid growth in capital-raising over the past two decades,” they write.
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Emerging market accounts for 39% of global output but only 22% of shareholder equity and 14% share of the global bond market (including corporate and sovereign debt), a gap that Keating and Natella will close in the next decade and a half as the supply of EM corporations take advantage of lower financing costs.
They estimate that the total market value of emerging market equities will increase by $98 trillion, emerging market corporate bonds will increase by $47 trillion, and EM sovereign debt will increase by $17 trillion. Over the same time period they expect DM equity, corporate bonds, and sovereign debt to go up by $125 trillion, $52 trillion, and $24 trillion respectively, narrowing the gap in all three categories. That doesn’t mean the effect will be felt evenly across all sectors (they expect the EM emphasis on resources to continue), but overall EM share of capital should fall more in line with its share of global GDP.
Of course China will play an outsized role in EM capital market development, but Keating and Natella expect this to be especially true in equity markets where China’s market share could become larger than all of EM ex-China combined.
Local institutional demand will help EM equity catch up
One reason EM markets have suffered in recent years is because they have relied on inflows from investors abroad, but Keating and Natella think that growth in local demand will play a major role in the growth of EM capital markets. The combination of high savings ratios in many emerging economies and the growth of domestic institutional investors (mutual funds, pension funds) means that EM could be less susceptible to hot money moving in and out of their markets with little notice.