!!!! Equity to Shrink !!!! ????

Volatility in the global market, unprecedented recession risks earlier and now the double dip worries coupled with the shrinking production has dented the sentiments of the investors across the globe. The dent in their views and approach as well as the changing demographic scenario in some part of the world has impacted the equity market the most and that too in a negative manner.

Barring an extraordinary change in investor behavior in the largest emerging economies, the role of equities in the global financial system will likely be reduced in the coming decade as per the new report from the McKinsey’s stable.  As emerging-market households attain a level of income that enables them to purchase financial assets, they are becoming a powerful new investor class, whose choices will help determine global demand for different asset classes. The actions of these new investors will, in turn, shape how businesses obtain the capital they need to grow, how other investors around the world fare, and how stable and resilient economies will be.

The financial assets held by the investors in the developing economies are growing at three times the rate with which they are growing in the developed economies.  By the end of the current decade, investors in developing economies will hold as much as 36 percent of global financial wealth, or between $114 trillion and $141 trillion.

 Investors in developed countries hold 30 to 40 percent or more of their financial assets in equities, but the investors of the emerging economies keep three-quarters of theirs in deposit accounts. While the use of equities in developing economies to finance growth and build savings is increasing, this evolution is taking place slowly. This likely results in a shift in the global allocation of financial assets toward deposits and fixed-income instruments and away from equities in this decade. This shift is being exacerbated by aging and other trends in the developed world that are dampening investor appetite for equities. As a result, equities could decline from 28 percent of global financial assets in 2010 to 22 percent in 2020.

But why the growing economies don’t go for equity investing? In a country like ours where majority of the investors are small or are for short term there must be a trusted, reliable and transparent market with strong protections and systems to provide easy market access. Rules and regulations may be are in place in emerging markets today, but enforcement is often unreliable.

In the meantime, even though total investor demand for equities will grow over the next decade, it will fall short of what corporations need by $12.3 trillion. This imbalance between the supply and demand for equity will be most pronounced in emerging economies, where companies need significant external financing for growth.  In Europe, however, allocations to equity are already falling, while the need for additional equity is rising for banks that must meet new capital requirements, making a significant equity gap likely.

The market will adjust to close this gap—but it will do so through a higher cost of equity to companies, which may prompt many firms to use less equity and more debt to fund growth. This will have ramifications for the global capital markets system, economies, and businesses alike.

Rest it’s never easy to predict what will happen in the coming decade, so better tighten your seat belts and get ready for a roller-coster financial ride, which is up the sleeve for sure.