Value of global financial assets outpaces GDP growth: McKinsey report

The total value of the world's financial assets grew faster in 2006 at 17 per cent to reach $167 trillion from $142 trillion in 2005, according to a McKinsey report titled, Mapping Global Capital Markets, Fourth Annual Report, released this month.  At constant exchange rates, the growth in global financial assets was 13 per cent.

The report, prepared by McKinsey Global Institute (MGI), the economics research arm of McKinsey & Company, was the latest year for which "comprehensive data was available".

While US remained the world's largest and most liquid financial market with an asset base of $56.1 trillion or nearly one-third of the global kitty, however, collectively, the Europe's financial markets (including the UK) are approaching the scale of US market as it reached the $53.2 trillion mark in 2006.

It is evident that Europe's capital markets are not only growing in size but in financial clout too and the emerging markets are rising as well. The picture as painted in the report clearly shows that the financial power is spreading beyond the US as other markets mature.

The McKinsey report indicates that India'as financial assets stood at $1.8 trillion in 2006 which was primarily equity driven. It is seen that equities and other securities accounted for 45 per cent of the country's financial assets while bank deposits contributed 36 per cent of the total volume. While 17 per cent of the assets was dominated by government debt securities, the balance 2 per cent was on account of private debt securities.

A comparative study on asset distribution in the emerging markets show that China's financial assets in 2006 was at $8.1 trillion where bank deposits accounted for 55 per cent of the total kitty and 30 per cent was equity driven. But in Putin's Russia equities made up for 66 per cent of the total financial assets worth $1.6 trillion and bank deposits made up for only 26 per cent of the asset volume.

In Japan, only 24 per cent of the country financial asset base of $19.5 trillion was equity driven while bank deposits and government debt securities accounted for 31 per cent and 35 per cent respectively of the total financial assets base.

The deepening of the private debt market was witnessed in US at 36 per cent, in UK at 25 per cent and Euro Zone at 32 per cent. The report said three-fourths of the gains in Europe's financial markets came from deepening of its equity and private debt markets.

Equity-driven growth
In 2006, the report said, the growth in global financial assets was "equity driven". The value of the world's equities went up by $9 trillion representing a 20 per cent growth at constant exchange rates, accounting for nearly half the total increase in financial assets.

The report also says that the growth in financial assets also outpaced the growth in global GDP. "World financial depth, measured as the ratio of financial assets to global GDP, increased by nearly 350 per cent".

India's financial depth made a phenomenal rise of 202 per cent in 2006, the McKinsey, the report says.

Referring to the emerging markets, the report said that these have "rebounded from the financial crisis that rocked many of their economies a decade ago. China is the heavy-weight, but the group also includes Russia and other rapidly developing nations in Asia, Latin America, Eastern Europe and Africa. Together, their financial assets surged by $5.3 trillion in 2006, up by 29 per cent at constant exchange rates, to a total of $23.6 trillion".

The report also said since 1990, the total value of financial assets in emerging markets has grown at "more than twice the rate of those in developed countries… Growth during the period has been primarily in bank deposits and equities, which constituted 39 per cent and 38 per cent of the growth respectively. In this group, while emerging Asian markets have the largest and most developed financial systems, Eastern Europe has the fastest growing financial markets, dominated by Russia".

The report pointed out that as the world financial markets grew, "more money than ever flew between countries and regions as investors sought opportunities outside the home market". The cross-border capital flows in 2006 zoomed to $8.2 trillion with the Eurozone accounting for nearly half the growth.

But the criss-crossing of the cross-border capital was dominated mostly by the developed economies with US, Eurozone and the United Kingdom accounting for about 80 per cent of the growth in global capital flows during the past decade.

Though the cross-border capital flows in the emerging markets have grown nearly at  twice the rate of developed countries to reach the $700-billion mark, however, this only constituted less than 10 per cent of the global cross-order capital volume.

But on the other hand the cross-border investments reached a staggering level of $74.5 trillion in 2006 up by 17 per cent at constant exchange rates. The report noted that today, "the world is more financially intertwined than ever before. Foreign investors own one in three government bonds around the world up from just one in nine in 1990. One in four equities and one in five private debt securities are now held by a foreign investor, triple the level in 1990."