McKinsey Global Institute

Report

Mapping global capital markets 2011

Aug. 2011 | by Charles Roxburgh, Susan Lund, John Piotrowski
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The 2008 financial crisis and worldwide recession halted a three-decade expansion of global capital and banking markets. Today, growth has resumed, fueled by expansion in developing economies but also by a $4.4 trillion increase in sovereign debt. The total value of the world’s financial stock, comprising equity market capitalization and outstanding bonds and loans, has increased from $175 trillion in 2008 to $212 trillion at the end of 2010, surpassing the previous 2007 peak. Similarly, cross-border capital flows grew to $4.4 trillion in 2010 after declining for the two previous years.

In its 2011 updated analysis of more than 75 countries on the size of their outstanding equity and debt, cross-border capital flows, and the stocks of foreign investment assets and liabilities, MGI finds that the recovery of financial markets remains uneven across geographies and asset classes and significant risks remain. Emerging markets account for a disproportionate share of growth in capital-raising as mature economies struggle. Debt markets remain fragile in many parts of the world—the growth of government debt and of lending in China accounts for the majority of the increase in credit globally.

Highlights of the report include:

  • The global stock of debt and equity grew by $11 trillion in 2010. The majority of this growth came from a rebound in global stock market capitalization, reflecting new equity issuance and stronger earnings expectations. Net new equity issuance in 2010 totaled $387 billion, and the majority of that issuance came from emerging-market companies. Initial public offerings (IPOs) continued to migrate to emerging-markets, with 60 percent of IPO deal volume occurring on stock exchanges in China and other emerging markets.
  • The overall amount of global debt outstanding grew by $5 trillion in 2010, with global debt to GDP increasing from 218 percent in 2000 to 266 percent in 2010. But growth patterns varied. Government bonds outstanding rose by $4 trillion, while other forms of debt had mixed growth. Bonds issued by financial institutions and securitized assets both declined, while corporate bonds and bank loans each grew.
  • On-balance-sheet loans of financial institutions rose by $2.6 trillion in 2010 (or 5.9 percent). However, this global total hides key differences among regions. Since 2007, outstanding loan volumes in both Western Europe and the United States have been broadly flat with a decline in 2009 followed by a modest increase in 2010. In Japan the stock of loans outstanding has been declining since 2000, reflecting deleveraging by the corporate sector. Lending in emerging markets has grown at 16 percent annually since 2000—and by 17.5 percent a year in China. Mainland China has added $1.2 trillion of net new lending in 2010, and other emerging markets $800 billion.
  • Cross-border capital flows grew in 2010 for the first time since 2007, reaching $4.4 trillion, but remain 60 percent below their 2007 peak. This reflects a dramatic reduction in inter-bank lending as well as less foreign direct investment and fewer purchases of debt securities by foreign investors. Contrary to conventional wisdom, this report finds that capital flows to developed countries—not those to emerging markets—are the most volatile.
  • The world’s investors and companies continue to diversify their portfolios internationally. The stock of foreign investment assets grew to $96 trillion, hitting a historical high in 2010—a ten-fold increase since 1990. Of this, central banks had accumulated $8.7 trillion in foreign-exchange reserves by the end of 2010, a sizable share of the world’s financial stock invested in government bonds and other low-risk securities. Foreign direct investment assets reached a new high of $21 trillion, as did the stock of foreign debt securities held by institutional and private investors. Banks have once again expanded their international lending, albeit only by a little, with the stock of cross-border loans returning to its 2007 level at $31 trillion.
  • Cross-border investment is growing fastest outside the traditional centers of financial wealth. In 1999, the web of cross-border investments centered on the United States, which was partner to 50 percent in all outstanding international financial positions. By 2009, the US share of total cross-border investments had shrunk to 32 percent. This reflected both a surge in cross-border investments within Western Europe following the creation of the euro, and phenomenal growth in the size and complexity of linkages with emerging markets. Prior to the 2008 financial crisis, cross-border investments between Latin America, emerging Asia, and the Middle East were growing at 39 percent annually—roughly twice as fast as these regions’ investments with developed countries.