>GLOBAL CAPITAL MARKETS (MCKINSEY)

ENTERING A NEW ERA

The current financial crisis and worldwide recession have abruptly halted a nearly three decade-long expansion of global capital markets. From 1980 through 2007, the world’s financial assets—including equities, private and public debt, and bank deposits—nearly quadrupled in size relative to global GDP. Global capital flows similarly surged. This growth reflected numerous interrelated trends, including advances in information and communication technology, financial market liberalization, and innovations in financial products and services. The result was financial globalization.

But the upheaval in financial markets in late 2008 marked a break in this trend. The total value of the world’s financial assets fell by $16 trillion last year to $178 trillion, the largest setback on record. At this writing in September 2009, equity markets have bounced back from their recent lows but remain well below their peaks. Credit markets have healed somewhat but are still impaired.
Going forward, our research suggests that global capital markets are entering a new era in which the forces fueling growth have changed. For the past 30 years, most of the overall increase in financial depth—the ratio of assets to GDP—was driven by the rapid growth of equities and private debt in mature markets. Looking ahead, these asset classes in mature markets are likely to grow more slowly, more in line with GDP, while government debt will rise sharply. An increasing share of global asset growth will occur in emerging markets, where GDP is rising faster and all asset classes have abundant room to expand.

In this report, we assess the effects and implications of the crisis through the lens of global financial assets and capital flows.1 Although the full ramifications of the crisis will take years to play out, it is already clear that the financial landscape has shifted in several ways. Most notably, we find that:

• Declines in equity and real estate values wiped out $28.8 trillion of global wealth in 2008 and the first half of 2009. Replacing this wealth will require more saving and less consumption, which may dampen global economic growth and necessitate significant adjustments by the banking business.

• Financial globalization has reversed, with capital flows falling by more than 80 percent. This has created turmoil for multinational financial institutions, caused currency volatility to soar, and sharply raised the cost of capital in some countries. It is unclear how quickly capital flows will revive, or whether financial markets will become less globally integrated.

• Some global imbalances may be receding. The US current account deficit has narrowed, as have the surpluses in China, Germany, and Japan that helped fund it. However, this may be a temporary effect of the crisis rather than a long-term structural shift.

To se the full report: GLOBAL CAPITAL MARKETS