Bain & Co. Report – A World Awash in Money

Bain & Co. Report – A World Awash in Money

Introduction: The world of capital turned upside down

Global capital markets have been in a state of turmoil since the financial collapse in late 2008. On-going intervention by fiscal policy makers and central banks to stimulate growth since then has heavily impacted equity and bond markets and depressed benchmark interest rates in many markets to historic lows. The turbulence has left senior corporate executives, institutional investors and financial intermediaries looking to allocate capital in a quandary: After the crisis has passed, will familiar capital market conditions once again reassert themselves? Or will markets settle into a new pattern that will require major shifts in investor behavior?

To tackle that question, Bain & Company’s Macro Trends Group set out to understand how underlying capital trends will influence the longer-term global investment environment by investigating how the quantity and scale of assets on the world balance sheet have evolved over time. We discovered that the relationship between the financial economy and the underlying real economy has reached a decisive turning point. The rate of growth of world output of goods and services has seen an extended slowdown over recent decades, while the volume of global financial assets has expanded at a rapid pace. By 2010, global capital had swollen to some $600 trillion, tripling over the past two decades. Today, total financial assets are nearly 10 times the value of the global output of all goods and services. (For a description of the relationship between financial assets broadly defined and the real economy, see sidebar “What do we mean by ‘capital’?” on page 4.)

Our analysis leads us to conclude that for the balance of the decade, markets will generally continue to grapple with an environment of capital superabundance. Even with moderating financial growth in developed markets, the fundamental forces that inflated the global balance sheet since the 1980s—financial innovation, high-speed computing and reliance on leverage—are still in place. Moreover, as financial markets in China, India and other emerging economies continue to develop their own financial sectors, total global capital will expand by half again, to an estimated $900 trillion by 2020 (measured in prevailing 2010 prices and exchange rates). More than any other factor on the horizon, the self-generating momentum for capital to expand—and the sheer size the financial sector has attained—will influence the shape and tempo of global economic growth going forward.

What does a world that is structurally awash in capital look like—and what will it mean for businesses and investors? The most immediate effect has been to paralyze, confuse and distort investment decisions. Large financial flows are creating dangerous pockets of excess capital in some places, while simultaneously cutting off access in other places where risk premiums are prohibitively high. To navigate the shifting currents of global growth in a time of capital superabundance will require financial market participants to recalibrate their expectations, ac- quire new skills for spotting and managing risk, and exercise enormous investment discipline. As we will elaborate in the following pages of this report, successful corporate and financial investors will be challenged to adapt to five new imperatives.

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Source: Bain & Company, Inc.



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