Long-term Trends in the Global Capital Markets

The McKinsey Quarterly has an interesting article about the trends that will continue after the current financial market turbulence calms down.  (free, but registration required)  Here are their key trends:

  • the continued growth and deepening of global capital markets
    as investors pour more money into equities, debt securities, bank
    deposits, and other assets around the world
  • the soaring
    growth of financial markets in emerging economies and the growing ties
    between financial markets in developed and developing countries
  • the shift of financial weight in Asia from Japan toward China and other fast-growing emerging markets
  • the growing financial clout of the eurozone countries and the significance of the euro
  • the
    burgeoning role of oil-rich Middle Eastern countries as suppliers of
    capital to the world, along with the rise of new financial hubs in the
    Middle East to complement the rapidly growing hubs in London and Asia

The first three make a lot of sense to me.  Here’s where I’m not convinced.  The continued growth of the Eurozone countries and the Euro.  Why?  It was certainly a strong trend of the past decade, but what will drive it in the future?  Not internal growth; nobody expects strong growth there.  Competitive advantage?  Rule of law is strong there, much better than in most emerging markets, but you can get that in the U.S.  Market-friendly laws regarding financial institutions?  Sure, but again, you can find that in the U.S. to a large extent.  No Sarbanes-Oxley, so that helps, but the same Basel capital rules apply.  You’d have to tell me something that’s not obvious to me before I’ll accept this trend into the future.

The final trend, regarding the growth of the Middle Eastern countries, depends on their continuing to reap high profits from oil.  If oil prices stay up, I buy the trend.  But I think there’s a good chance that prices have greatly overshot an equilibrium, and the the Middle East will have to take a step down.  But that’s an open issue.

What difference does this make to a U.S. business?  First, you’ve had a strong competitive advantage in raising capital, compared to similar companies in other parts of the world.  You’ve just taken for granted the strong financial markets in both debt and equity.  However, your competitors overseas will gain easier access to finance, putting them on a nearly-level playing field in this regard.

Second, you may want to widen your perspective as you raise capital, especially if you’re a Fortune 500 corporation.  There’s lots of capital in overseas markets; don’t limit your horizon to the United States financial markets.