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Emerging capital markets are expected to double their global index share by 2030, with China overtaking the UK and Japan to become the world’s 2nd largest equity market
Despite rapid growth in capital-raising over the past two decades, emerging country capital markets remain underdeveloped relative to the size of their economies. With a 39% share of global output – or 51% based on purchasing power parity, the 20 emerging nations currently only represent less than half of their fair share of the global capital market universe - accounting for only 22% of global equity market capitalization, and a 14% of the global corporate and sovereign bond markets. The Credit Suisse Research Institute, however, forecasts that by 2030, Emerging Market share of global equity market capitalization will increase to 39%, while for corporate bonds and sovereign bonds to 36% and 27% respectively, around double their current market share.
“The disparity between developed and emerging nations in the global capital market universe will close by 2030. 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. Moreover, the growing ability of Emerging Market corporates to access local currency capital markets shields them from the risk of exposure to unforeseen exchange-rate volatility,” says Stefano Natella, Global Head of Equity Research, Investment Banking, at Credit Suisse in New York.
Credit Suisse forecasts that the fastest 17-year nominal US dollar compound annual growth rate in market value of any asset class will be Emerging Market equities and corporate bonds at 13%, followed by Emerging Market sovereign bonds at 8%, doubling the growth pace of their developed peers. Credit Suisse is forecasting growth in developed market equities, corporate and sovereign bonds to slow down at a pace of 7%, 5% and 3%, respectively. Consequently, the market value for emerging equities, corporate and sovereign bonds increases by USD 98 trillion, USD 47 trillion and USD 17 trillion, respectively, in nominal dollar terms between 2014 and 2030E, versus gains of USD 125 trillion, USD 52 trillion and USD 24 trillion, respectively, for these asset classes in the developed world.
“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. 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,” explains Alexander Redman, Global Emerging Markets Equity Strategist, Investment Banking at Credit Suisse in London.
China equity market to overtake the UK and Japan in 2030
While the US will remain the largest equity market in 2030 with a capitalization of USD 98 trillion and a weight of 35%, China will overtake both the UK and Japan to become the second largest market with a USD 54 trillion capitalization and a weight of 19%. Cumulatively China has accounted for 40% (USD 639 billion) of the total emerging world equity capital markets deal value (initial public offerings and secondary public offerings) since 2000. Over the next 17 years, China’s share will increase to 60% or USD 3.6 trillion, representing a 5.5 fold nominal increase. The forecast is based on the assumption that China’s capital account liberalizes over the next 17 years, giving foreign investors access to the A-share market.
Similarly, Credit Suisse also forecasts China's dominance of corporate bond market deal value in Emerging Markets over the last 14 years (a 37% share or USD 1.6 trillion of the total) will persist, eventually taking a 53% share (or USD 18.4 trillion) of total Emerging Market primary activity by 2030.
China will also represent the largest growth in corporate bond market value by 2030. Total issuance originating from China is projected to increase by nearly tenfold from USD 3 trillion in 2014 to USD 32 trillion by 2030, consistent with large-scale disintermediation by Chinese banks of state-owned enterprise and local government assets.
Emerging Markets to capture bigger share of underwriting fees
Credit Suisse also forecasts emerging countries not only will generate more underwriting fees, but will also capture a bigger share of the pie over the next 17 years. According to the report, total capital markets underwriting fees globally for the period from 2014 to 2030 will reach USD 638 billion in nominal terms, compared to the USD 307 billion in fees earned in the period 2000 to 2014. Of the fee pool, 40% or USD 256 billion is expected to be generated from Emerging Markets, versus a far smaller share of 16% (or USD 49 billion) since 2000.
The division of fees between equity and debt capital markets until 2030 will also be much more balanced (49%/51%, respectively), in comparison to a 67-33% split as recorded from 2000 to 2013.
The wallet share of equity and debt capital market fees captured by Emerging Market local brokers will also rise from 45% (USD 22 billion) from 2000 to 2013 to 58% (USD 149 billion) between 2014 and 2030E.
Other key statistical conclusions reached in this study also include:
• The BRICs increase their share of the global equities universe to 26% by the end of 2030, up from 11% in 2014 and 2% in 1996. Within Emerging Markets, BRICs will represent 66% of equity market capitalization by 2030, up from 52% in 2014 and 21% in 1996.
• Saudi Arabia, Indonesia and Turkey will undergo a meaningful change in their relative size rankings within Emerging Markets—Saudi Arabia rising to the sixth largest market from 10th, Indonesia rising to seventh largest from 12th, and Turkey rising to 10th largest from 17th.
• Countries with the swiftest equity capitalization dollar CAGR between 2014 and 2030E are Turkey (17%), China (16%) and Indonesia (15%)—these growth rates include both the impact of dollar price returns and that of net issuance and inclusions.
• An almost doubling of the global sovereign bond market value by 2030 to USD 84 trillion from USD 43 trillion in 2014 of which 42% of the gain is attributable to Emerging Markets.
• The total cumulative secondary equity revenue opportunity is estimated to be USD 392 billion in emerging markets and USD 827 billion in the developed markets between 2014 and 2030.