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.