McKinsey's Mapping Global Capital Markets 2011

8/6/2019 McKinsey's Mapping Global Capital Markets 2011

1/38

McKinsey Global Institute

Updated research

Mapping global capitalmarkets 2011

Charles RoxburghSusan LundJohn Piotrowski

August 2011


2/38

Copyright McKinsey & Company 2011

The McKinsey Global Institute

The McKinsey Global Institute (MGI), the business and economics research

arm o McKinsey & Company, was established in 1990 to develop a deeper

understanding o the evolving global economy. Our goal is to provide leaders inthe commercia l, public, and social sectors with the acts and insights on which

to base management and policy decisions.

MGI research combines the disciplines o economics and management,

employing the analytical tools o economics with the insights o business

leaders. Our micro-to-macro methodology examines microeconomic

industry trends to better understand the broad macroeconomic orces aecting

business strategy and publ ic policy. MGIs in-depth reports have covered more

than 20 countries and 30 industries. Current research ocuses on our themes:

productivity and growth; the evolution o global inancial markets; the economic

impact o technology and innovation; and urbanization. Recent reports have

assessed job creation, resource productiv ity, cities o the uture, and the impact

o the Internet.

MGI is led by three McKinsey & Company directors: Richard Dobbs, James

Manyika, and Charles Roxburgh. Susan Lund serves as director o research.

Project teams are led by a group o senior ellows and include consultants rom

McKinseys oices around the world. These teams draw on McKinseys global

network o partners and industry and management experts. In addition, leading

economists, including Nobel laureates, act as research advisers.

The partners o McKinsey & Company und MGIs research; it is not

commissioned by any business, government, or other institution. For urther

inormation about MGI and to download reports, please visit

www.mckinsey.com/mgi.

About this research

MGI is committed to ensuring that published research remains current and

relevant. This research update oers readers rereshed data and analysis rom

our September 2009 report Global capital markets: Entering a new era.

In this update, we examine how the worlds inancial markets are recovering

ater the 2008 inancial crisis. We oer new data or more than 75 countries

on the growth and composition o their inancial stock, cross-border capital

lows, and oreign investment assets and liabilities. We discuss implications or

businesses, policy makers, and inancial institutions, and we invite others to

contribute to this dialogue.

In Fall 2011, MGI will release a ull update to the January 2010 report Debt and

deleveraging: The global credit bubble and its economic consequences.


3/38

1Mapping global capital markets 2011McKinsey Global Institute

Mapping global inancial markets2011

The 2008 inancial crisis and worldwide recession halted an expansion o global

capital and banking markets that had lasted or nearly three decades. Over the

past two years, growth has resumed. The total value o the worlds inancial stock,

comprising equity market capitalization and outstanding bonds and loans, has

increased rom $175 trillion in 2008 to $212 trillion at the end o 2010, surpassing the

previous 2007 peak.1 Similar ly, cross-border capital lows grew to $4.4 trillion in 2010

ater declining or the previous two years.

Still, the recovery o inancial markets remains uneven across geographies and asset

classes. Emerging markets account or a disproportionate share o growth in capitalraising as mature economies struggle. Debt markets remain ragile in many parts o

the world, and the growth o government debt and o Chinese lending accounts or

the majority o the increase in credit globally.

In this research update, we provide a act base on how the worlds inancial markets

are recovering.2 We draw on rereshed data rom three proprietary McKinsey Global

Institute (MGI) databases that cover the inancial assets, cross-border capital lows,

and oreign investments o more than 75 countries through the end o 2010. These

data provide a granular view o the growth in the worlds inancial markets and asset

classes. The goal o this paper is to provide an overv iew o the key trends and share

preliminary thoughts on their implicat ions. We invite others to add to this discussionand draw out speciic implications or dierent actors within the global inancial

system. Among our key indings are these:

The global stock o debt and equity grew by $11 trillion in 2010. The majority o this

growth came rom a rebound in global stock market capitalization and growth in

government debt securities.

The overall amount o global debt outstanding grew by $5 trillion in 2010, but

growth patterns varied. Government bonds outstanding rose by $4 trillion, while

other orms o debt had mixed growth. Bonds issued by inancial institutions and

securitized assets both declined, while corporate bonds and bank loans both

grew.

Lending in emerging markets has grown particularly rapidly, with China adding

$1.2 trillion o net new lending in 2010 and other emerging markets adding

$800 billion.3

Cross-border capital lows grew in 2010 or the irst time since 2007, reaching

$4.4 trillion. These lows remain 60 percent below their peak due mainly to a

1 In contrast to previous reports, this year we include loans outstanding in the global nancial

stock rather than deposits. This gives a view o the capital raised by corporations, households,

and governments around the world. We continue to maintain data on global deposits as well.2 MGI began research on mapping global capital markets in 2005. The last report in this series

was Global capital markets: Entering a new era, September 2009. That report, and other MGI

research on global nancial markets, is available at www.mckinsey.com/mgi.

3 Throughout this paper, China reers to the mainland o the country, excluding Hong Kong,

which we treat separately.


4/38

2

dramatic reduction in interbank lending as well as less direct investment and ewer

purchases o debt securities by oreign investors.

The worlds investors and companies continue to diversiy their portolios

international ly, with the stock o oreign investment assets growing to $96 trillion.

Ater two years o decline, global imbalances are once again growing. The US

current account deicitand the surpluses in China, Germany, and Japan that

helped und itincreased again in 2010. These global imbalances in saving and

consumption remain smaller than their pre-crisis peaks but appear persistent.

THE GLOBAL FINANCIAL STOCK GREW BY $11 TRILLION IN 2010,

SURPASSING ITS 2007 LEVEL

The worlds stock o equity and debt rose by $11 trillion in 2010, reaching a total o

$212 trill ion.4 This surpassed the previous peak o $202 trillion in 2007 (Exhibit E1).

Nearly hal o this growth came rom an 11.8 percent increase ($6 trillion) in the marketcapitalization o global stock markets during 2010. This growth resulted rom new

issuance and stronger earnings expectations as well as increased valuations. Net

new equity issuance in 2010 totaled $387 billion, the majority o which came rom

emerging market companies. Initial public oerings (IPOs) continued to migrate to

emerging markets, with 60 percent o IPO deal volume occurring on stock exchanges

in China and other emerging markets.

4 This includes the capitalization o global stock markets; the outstanding ace values o bonds

issued by governments, corporations, and nancial insti tutions; securitized debt instruments;

and the book value o loans held on the balance sheets o banks and other nancial

institutions.

Exhibit E1

Global financial stock has surpassed pre-crisis heights,totaling $212 trillion in 2010

11

19

2935

41 4144 42

13

16

25

28

30 3237 41

11

17

36

45

55

6534

4854

3

2

10

33

8

9

212

49

15

09

201

47

169

08

175

45

168

07

202

43

158

06

179

40Nonsecuritized loansoutstanding

147

05

155

38

116

2000

114

Securitized loansoutstanding

65

95

72

24

1990

54

31

Nonfinancial corporatebonds outstanding

Financial institutionbonds outstanding

Public debt securitiesoutstanding

Stock marketcapitalization

2010

22

1 Based on a sample of 79 countries.2 Calculated as global debt and equity outstanding divided by global GDP.NOTE: Numbers may not sum due to rounding.

SOURCE: Bank for International Settlements; Dealogic; SIFMA; Standard & Poors; McKinsey Global Banking Pools;McKinsey Global Institute analysis

321 334 360 376 309 356 356263261

Global stock of debt and equity outstanding1$ trillion, end of period, constant 2010 exchange rates

Financialdepth2 (%)

9.5

6.7

12.7

4.1

-3.3

9.7

-5.6

5.9

7.8 11.9

8.1 11.8

7.2 5.6

199009 200910

Compound annualgrowth rate

%


5/38


Credit markets struggle while government debt soars

Global credit markets also grew in 2010, albeit more unevenly.5 The total value

o all debtincluding bonds issued by corporations, inancial institutions, and

governments; asset-backed securities; and bank loans held on balance sheets

reached $158 trillion, an increase o $5.5 trillion rom the previous year. Governmentdebt grew by 12 percent and accounted or near ly 80 percent o net new borrowing,

or $4.4 trillion. This relected large budget deicits in many mature economies,

ampliied by a slow economic recovery. Government debt now equals 69 percent o

global GDP, up rom just 55 percent in 2008.

Bond issues by noninancial businesses remained high in 2010 at $1.3 trillionthats

more than 50 percent above the level prior to the 2008 crisis. This relected very low

interest rates and possibly tighter access to bank credit. Corporate bond issuance

was widespread across regions.

Bank lending grew in 2010 as well, with the global stock o loans held on the balancesheets o inancial institutions rising by $2.6 trillion (5.9 percent). Emerging markets

accounted or $2 trillion o this growth with China alone contr ibuting $1.2 trillion.

Bank lending grew by $300 billion in both the United States and Western Europe

(5.6 and 1.5 percent, respective ly) and by $200 billion in other developed economies.

However, bank loans shrunk by $200 billion in Japan. At the same time, the stock

o securitized loans ell by $900 bill ion. Issuance o securitized assets remains at

less than two-thirds o its pre-crisis level. Indeed, i we exclude mortgage-backed

securities issued by US government enti ties (e.g., Fannie Mae and Freddie Mac),

securitization volumes are only 17 percent o their pre-cris is level. Whether or not

securitization outside o government entities will emerge as a signiicant source o

credit in the years to come remains to be seen.

On the other side o bank balance sheets, we see a shit in unding sources with

more deposits and less debt. Worldwide bank deposits increased by $2.9 trillion

in 2010.6 China accounted or $1.1 trillion o the increase in bank deposits (o which

roughly 60 percent was rom households and 40 percent rom corporations), with

total Chinese deposits reaching $8.3 trillion. This relected the high saving rate o

households and limited range o saving vehicles available to them, as well as the large

retained earnings o corporations.7 Bank deposits in the United States increased by

$385 billion, while deposits in Western Europe rose by $250 billion. In contrast, the

stock o bonds issued by inancial institutions shrank as they sought more stable

sources o unding. Financial institution bonds outstanding declined by $1.4 trillion,

the irst signiicant decrease ever recorded in our data series that begins in 1990.

5 In Fall 2011, we will explore the topic o debt and deleveraging in more detail in a ull update to

our January 2010 report, Debt and deleveraging: The global credit bubble and its economic

consequences.

6 We dene bank deposits as deposits in time and savings accounts made by households

and nonnancial corporations. This gure excludes cur rency in circulation, money market

instruments, and nonbank nancial institutions deposi ts with other entities in the bankingsystem.

7 For more explanation o Chinese saving, see Farewell to cheap capital? The implications o

long-term shits in global saving and investment, McKinsey Global Institute, December 2010

(www.mckinsey.com/mgi); Marcos Chamon and Eswar Prasad, Why are saving rates o urban

households in China rising? NBER working paper, 14546, December 2008.


6/38

4

Emerging markets account for a growing share of global financial

stock

The majority o absolute growth in the global inancial stock occurred in mature

markets in 2010, but emerging markets are catching up. Developed countries

inancial stock grew by $6.6 trillion, while that o emerging markets increased by$4.4 trillion. Among emerging markets, China alone accounted or roughly hal o that

growth with $2.1 trillion, relecting large increases in bank lending and the market

capitalization o the Chinese equity market.

Emerging markets inancial stock is growing much aster than that o developed

countries, increasing by 13.5 percent in 2010 compared with 3.9 percent in mature

countries. This trend has been the norm or some time. From 2000 to 2009, the stock

o equity and debt in emerging markets grew by an average o 18.3 percent a year

compared with only 5.0 percent in developed countries. So while emerging markets

collectively account or only 18 percent o the worlds total inancial stock at the end

o 2010, they are in the process o catching up and are becoming impor tant players inthe global inancial landscape.

Looking ahead, the long-term undamental drivers o inancial market growth remain

strong in developing economies. Many o these economies have high national

saving rates that create large sources o capital or investment, and they have vast

investment needs or inrastructure, housing, commercia l real estate, and actories

and machinery.8 Moreover, their inancial markets today are much smaller relative to

GDP than those in mature markets. The total value o all emerging market inancial

stock is equal to 197 percent o GDP161 percent i we exclude Chinawhich is

much lower than the 427 percent o GDP o mature economies (Exhibi t E2).

8 For projections on growth in investment demand in emerging markets, see Farewell to cheap

capital? The implications o long-term shits in global saving and investment, McKinsey Global

Institute, December 2010 (www.mckinsey.com/mgi).

Exhibit E2

116

31

115

47

75

22072

49

28

44

38

11972

69

152

97

9396 62

57 48

124

2

52

3

2031

20

2434

142

62

6

LatinAmerica

148

273

OtherAsia

168

54

10 7

MiddleEast andAfrica

190

66

615

India

209

60

1 7

China

280

127

1016

Otherdeveloped

388

91

29

WesternEurope

400

110

1519

Japan

Nonsecuritized loansoutstanding

106

1018

UnitedStates

462

44

457






CEE andCIS2

77

Financial depth is lower in emerging markets, primarily because ofthe absence of corporate bond and securitization markets

1 Calculated as total regional debt and equity outstanding divided by regional GDP.2 Central and Eastern Europe and Commonwealth of Independent States.

Financial depth,1 year end 2010% of regional GDP



7/38


More speciically, we see ample potential or growth by looking at individual asset

classes. Emerging market equities, or example, have signiicant headroom to grow

as more state-owned enterprises are privatized and as existing companies expand.

Markets or corporate bonds and other private debt securities remain nascent. The

value o corporate bonds and securitized assets is equal to just 7 percent o GDPin emerging markets compared to 34 percent in Europe and 108 percent in the

United States. With the appropriate regulatory changes, corporate bond markets

in emerging markets could provide an alternative to bank inancing, and some o

the plain vanilla orms o securitization (such as those backed by low-risk prime

mortgages) could develop.

Bank deposits also consti tute an asset class with enormous growth potentia l in the

developing world, where large swaths o the population have no bank accounts.

There are an estimated 2.5 billion adults with discretionary income who are not part o

the ormal inancial system.9 Bank deposits will swell as household incomes rise and

individuals open savings accounts.

In contrast, prospects or rapid growth in private debt securities and equity in mature

economies are relatively dim. The circumstances that ueled the rapid increases o

past decades have changed, and this makes it likely that total inancial assets will

grow more in line with GDP in coming years. For instance, debt issued by inancial

institutions accounted or 42 percent o the $115 trillion increase in private-sector

debt since 1990, with growth in asset-backed securities accounting or an additional

16 percent. However, securitization is now negligible outside government programs,

and inancial institutions are reducing their use o debt inancing as they increase

their capital levels and raise more deposits. In equities, net new issuance o equities

has been low and was actua lly negative rom 2005 to 2007. Corporate proits are

at historic highs relative to GDP. This means that urther equity market growth

would have to come either rom higher equity valuations or rom urther increases in

corporate earnings as a share o GDP.

GLOBAL CAPITAL FLOWS ARE RECOVERING, REACHING

$4.4 TRILLION IN 2010

One o the most striking consequences o the 2008 inancial crisis was a steep drop

in cross-border capital lows, including oreign direct investment (FDI), purchases and

sales o oreign equities and debt securities, and cross-border lending and deposits.

These capital lows ell by about 85 percent during the crisis rom $10.9 trillion in

2007 to just $1.9 trillion in 2008 and to $1.6 trillion in 2009. This relects the plungein demand or oreign investment by banks, companies, and other investors during

the global inancial turmoil. Cross-border capital lows picked up in 2010 as the

economic recovery took hold, reaching $4.4 trillion (Exhibit E3). Nonetheless, they

remain at their lowest level relative to GDP since 1998.

This decline in cross-border capital lows during a recession its the historical pattern.

Cross-border investing had experienced three other boom-and-bust cycles since

1990, with sharp declines ollowing the economic and inancial turmoil in 199091,

199798, and 200002. The question today is whether cross-border capital lows

ater the most recent recession will eventually exceed their previous heights, as

9 See Alberto Chaia, Tony Goland, and Robert Schi, Counting the worlds unbanked,

McKinsey Quarterly, March 2010; Alberto Chaia et al, Hal the world is unbanked, The Financial

Access Initiative, October 2009.


8/38

6

they have ater past recessions, or whether new regulations and shits in investor

sentiment will dampen such lows.

Contraction of interbank lending led the decline in capital flows

Nearly all types o capital lows have declined relative to their 2007 peak, but thelargest decrease has been in cross-border bank lending. During 2008 and 2009,

these lows turned negative, indicating that on a net basis creditors brought their

capital back to their home markets. Cross-border lending resumed in 2010, but these

lows are still $3.8 trillion below their peak, amounting to just $1.3 trillion in 2010.10

Interbank lending in Western Europe accounted or 61 percent, or $2.3 trillion, o

the total decline in cross-border lending. This relects the uncertainty created by the

sovereign debt crisis in Europe and the continuing ragili ty o the inancial system.

Equity cross-border lows have been less volatile than debt lows. Foreign direct

investment has historically been the least volatile type o capital low as it relects

long-term corporate investment and purchases o less liquid assets, such as actoriesand oice buildings. Recent years have proved no exception. FDI lows totaled

$900 bil lion in 2010, roughly 45 percent o their 2007 peak, whi le purchases o oreign

equities by investors totaled $670 billion, 30 percent below their 2007 level.

Cross-border capital f lows to emerging markets have been less volatile

than those to developed countries

Contrary to the common perception that capital lows to emerging markets are

highly volatile, we observe that lows between developed countries are more volatile.

When adjusting or average size, capita l lows to developed countries are 20 percent

more volatile than lows to emerging markets. Most o this variability comes rom

cross-border lending, which is nearly our times as volatile as FDI. In the 2008 crisis,capital lows between mature countries turned negative in the ourth quarter o 2008

10 Similarly, growth o interbank lending, particularly in Western Europe, explains part o the

growth in global capital fows prior to the 2008 nancial crisis.

Exhibit E3

12

10

8

6

4

2

0

+2.8

4.4

1.6

10.9

2005

7.1

-9.2

20102000

4.7

1995

1.5

1990

0.9

1985

0.5

1980

0.4

Cross-border capital flows grew to $4.4 trillion in 2010, or 40 percent oftheir 2007 level

% of globalGDP

4 5 6 134 15 8

SOURCE: International Monetary Fund; Institute of International Finance; McKinsey Global Institute analysis

1 Inflows defined as net purchases of domestic assets by nonresidents (including nonresident banks); total capital inflowscomprised of inward FDI and portfolio (e.g., equity and debt) and lending inflows.

2 Based on a sample of 79 countries.

Total cross-border capital inflows, 198020101,2

$ trillion, constant 2010 exchange rates


9/38


and the irst quarter o 2009, indicating that oreign investors sold investments and

repatriated their money back to their home country. During the same period, quarterly

capita l lows to emerging markets ell by $150 billion but remained positive, indicating

that oreign investors did not withdraw money back to their home countries and

continued to make new investments (Exhibit E4).

The lower volatility o capital lows to emerging markets partly relects the act that

more than 60 percent o such lows over the past decadeand in particular FDI

have been in equity investments. As we have explained, this is the most stable type o

capita l low. In contrast, just one-third o oreign investment lows into mature markets

are in equity investments.

In 2010, oreign capital in lows to Latin America surged, reaching $254 billionmore

than lows to China, India, and Russia combined. This total was 60 percent higher

than in 2009 and our times as high as their annual average rom 2000 to 2007.

Foreign investors purchased $76 billion o Latin American government and corporate

bonds in 2010, while $59 billion constituted cross-border lending. In contrast to lows

to other emerging markets, only 31 percent o total lows to Latin America were in the

orm o FDI. Across countries, Brazil received a majority o oreign capita l inlows,

accounting or $157 billion o the total. This surge in oreign investor interest has

prompted concerns about unwanted exchange-rate appreciation in Brazil.

Emerging markets are also becoming more important oreign investors in world

markets as their capital out lows grow rapidly. Foreign investments rom emerging

market investors reached $922 billion in 2010, or 20 percent o the global total. This is

up sharply rom just $280 bill ion, or 6 percent o the global total, in 2000. A large part

o this investment outlow61 percentrelected purchases o oreign securities by

central banks. However, investments rom other investors, including corporations,individuals, and sovereign wealth unds, are also rising. FDI rom emerging

markets reached $159 billion, lower than its 2008 peak but still more than double

its size ive years earlier. Although Chinas outward FDI has attracted signi icant

Exhibit E4

Capital flows to emerging markets are smaller but more stable thanflows to developed countries

SOURCE: International Monetary Fund; McKinsey Global Institute analysis

Cross-border capital inflows to developed countriesand emerging markets, Q1 2000Q4 2010$ trillion, constant 2010 exchange rates

35

8

13

10

21

53

Interbanklending

Lending tononbanksectors

Debtsecurities

Equitysecurities

FDI

Emerging

6.7

7

22

Developed

48.3

19

12

100% =

Composition of total inflows,200010%; $ trillion(constant 2010 exchange rates)

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Q1 2000 Q1 2002 Q1 2004 Q1 2006 Q1 2008 Q1 2010

Developed

Emerging


10/38

8

attention, it remains less than that rom the ormer countries o the Soviet Union in

the Commonwealth o Independent States ($44 billion or China compared with

$60 billion rom CIS). Emerging market investors will become increasingly important

players in oreign markets as their economies grow.

THE STOCK OF CROSS-BORDER INVESTMENTS HIT $96 TRILLION

IN 2010, BUT GLOBAL IMBALANCES ARE GROWING AGAIN

Relecting the growth o global capital lows, the worlds stocks o oreign investment

assets and liabil ities also increased in 2010. Global oreign investment assets

reached $96 tril lion, nearly ten times the amount in 1990, as companies and

investors sought to diversiy their por tolios globally. Not surprisingly, investors rom

developed countries account or the largest share o these assets (87 percent).

The United States is the worlds largest oreign investor, with $15.3 trillion in oreign

assets, ollowed by the United Kingdom with $10.9 trillion and Germany with

$7.3 trillion. Foreign investment assets owned by emerging markets have grown at

twice the pace o those o mature countries, as their outward oreign investment lows

increase.

Looking at the net position o each countrys oreign assets and liabilities reveals

a dierent picture. We see that the United States is the worlds largest net oreign

debtor, with oreign liabilities exceeding assets by $3.1 trillion, or 21 percent o GDP

(Exhibi t E5). This relects the persistent US current account deicit, which must be

unded with net oreign borrowing. Spain is the worlds second-largest oreign debtor,

with a net oreign debt o $1.3 trillion, or 91 percent o GDP. Australia has run a large

current account de icit or many years and is the third-largest oreign debtor with a

net debt o $752 billion (63 percent o GDP).

On the creditor side, Japan remains the worlds largest net oreign creditor, with

net assets o just over $3 trillion. This may seem surprising given that Japan has

the worlds largest government debt at more than 200 percent o GDP. However,

Japanese savers, banks, and corporationsnot oreign investorshold more than

Exhibit E5

In 2010, the United States was the worlds largest foreign debtor andJapan the globes largest foreign creditor


1 Calculated as foreign investment assets less foreign investment liabilities.

Largest net foreign debtors1 Largest net foreign creditors1

-308

-325

-331

-355

-446

-453

-703

-752

-1,263

-3,072

360

492

585

626

691

698

882

1,207

2,193

3,01015,284 18,356

Assets Liabilities

6,759 3,748

1,673

1,044

587

2,734

10,943

259

315

6,622

162

2,936

1,796

1,290

3,187

11,390

613

646

6,947

470

3,892

7,323

1,084

3,047

2,723

1,015

783

6,622

1,122

1,699

6,116

202

2,348

2,032

389

198

884

762

Net position, 20101

$ billion

Assets Liabilities

UnitedStates

Spain

Australia

Brazil

Italy

UnitedKingdom

Mexico

Greece

France

Poland

Japan

China

Germany

Saudi Arabia

Switzerland

Hong Kong

Taiwan

United ArabEmirates

Singapore

Norway


11/38


90 percent o this debt. At the same time, Japan has signiicant oreign investment

assets, including roughly $1 trillion o central bank reserve assets, $830 billion in

oreign direct investment abroad, $3.3 trillion o oreign equity and debt securities,

and $1.6 trillion in oreign lending and deposits.

China is the worlds second-largest net oreign creditor with net oreign assets o

$2.2 trillion, and Germany is third ($1.2 trillion). These are also the countr ies that have

maintained the largest current account surpluses.

Countries annual current account surpluses and deicits ell sharply ater the

2008 inancial crisis and recession, roughly halving in size. This relected the lack

o cross-border investment and a sharp decline in world trade. In 2010, however,

global imbalances began to grow again. Whether or not they continue to increase

will depend on saving, investment, and consumption trends within countries as well

as on global currency values and trade deicits. Without higher saving rates in deicit

countries, and without exchange-rate adjustments and more domestic consumption

in some countries with persistently large trade surpluses, global imbalances could

well grow to their pre-crisis size.

* * *

In the ollowing pages, we provide a more detailed look at the state o the worlds

inancia l markets at the end o 2010. The data we present here come rom MGIs

proprietary databases on global inancial markets. The exhibits that ollow cover

changes in the inancial stock, cross-border capital lows, and oreign investment

assets and liabili ties o more than 75 countries around the world.


12/38


13/38


Exhibits

GLOBAL FINANCIAL STOCK

Exhibi t 1. Global inancial stock, 19902010

Exhibi t 2. Global equity outstanding, 19902010

Exhibi t 3. Net equity issuances, 200510

Exhibi t 4. IPO deal volume by exchange location, 200010

Exhibi t 5. Global debt outstanding by type, 200010

Exhibi t 6. Nonsecuri tized loans outstanding by region, 200010

Exhibi t 7. Securitization issuance by region, 200010

Exhibi t 8. Noninancial corporate bond issuance, 200010

Exhibi t 9. Global public debt outstanding, 19902010

Exhibi t 10. Public debt outstanding by region, 200010

Exhibi t 11. Deposits by region, 200010

Exhibi t 12. Emerging markets share o global inancial stock, 2010

Exhibi t 13. Financial depth by region, 2010

Exhibi t 14. Financial depth vs. per capita GDP, 2010

CROSS-BORDER CAPITAL FLOWS

Exhibi t 15. Global cross-border capita l lows, 19802010

Exhibi t 16. Change in cross-border capita l lows by asset class, 200710

Exhibi t 17. Capital lows to developed and emerging markets, 200010

Exhibi t 18. Capital lows to and rom emerging markets, 2010

FOREIGN INVESTMENT ASSETS AND LIABILITIESExhibi t 19. Stock o global oreign investment assets, 19902010

Exhibi t 20a. Bilateral cross-border investment assets between regions, 1999

Exhibi t 20b. Bilateral cross-border investment assets between regions, 2009

Exhibi t 21. International investment positions by country, 2010


14/38

12


15/38


The worlds inancial stock rose by $11 trillion in 2010

The worlds stock o equity and debt rose by $11 trillion in 2010 to reach $212 trillion,

surpassing the previous peak o $202 trillion in 2007. More than hal o the increase

came rom growth in equities, which rose by 12 percent or $6 trillion. Credit marketsalso grew in 2010, albeit more unevenly. Government debt increased by $4.4 trillion,

with growth concentrated in the advanced economies that were still coping with the

eects o the 2008 inancial crisis. Bank lending also rose with more than hal o the

increase coming rom emerging markets. In contrast, the outstanding amounts o

bonds issued by inancial institutions and o securitized assets both shrank as the

inancial sector moved to more stable sources o unding and securitization remained

at low levels.

Note: For this 2010 update, we use a new deinition o the global inancial stock,

replacing bank deposits and currency with loans held on balance sheets.11 Using

loans gives a consistent perspective o the unds raised by a countrys residenthouseholds, corporations, and government.

11 The McKinsey Global Institute began research on mapping global capital markets in 2005. The

most recent report in this series was Global capital markets: Entering a new era, September

2009. That report, and other research on global nancial markets, is available at

www.mckinsey.com/mgi.

Exhibit 1

Global financial stock has surpassed pre-crisis heights,totaling $212 trillion in 2010

11

19

2935

41 4144 42

13

16

25

28

30 3237 41

11

17

36

45

55

6534

4854

3

2

10

338

9

212

49

15

09

201

47

16

9

08

175

45

168

07

202

43

158

06

179

40Nonsecuritized loansoutstanding

147

05

155

38

116

2000

114


65

95

72

24

1990

54

31





2010

22

1 Based on a sample of 79 countries.2 Calculated as global debt and equity outstanding divided by global GDP.NOTE: Numbers may not sum due to rounding.


321 334 360 376 309 356 356263261

Global stock of debt and equity outstanding1

$ trillion, end of period, constant 2010 exchange rates

Financialdepth2 (%)

9.5

6.7

12.7

4.1

-3.3

9.7

-5.6

5.9

7.8 11.9

8.1 11.8

7.2 5.6

199009 200910

Compound annualgrowth rate%


16/38

14

Global stock market capitalization grew to $54 trillion

The total value o equity securities outstandingthe worlds stock market

capitalizationis the single largest component o the global inancial stock. At

$54 trillion at the end o 2010, equities outstanding account or just over 25 percent othe worlds outstanding inancial stock. Although the 2010 stock market capita lization

was $11 trillion below its peak in 2007, it accounted or more than hal o the growth in

global inancial assets in 2010 and posted the astest growth rate (nearly 12 percent).

The capita lization o the US equity market rose by $2.3 trillion and accounted or

40 percent o the global increase. China saw the second-largest increase in the

value o its equity securi ties o some $526 billion.12 Growth in equity markets in many

countries relected the continued recovery o depressed valuations ollowing large

stock market decl ines in 2008. However, we also see growth in the book value o

equity that relects rising corporate proits. Growth in the book value o equity has

been much more stable than the market value, with an average increase o about

8 percent per annum since 1990.

12 Chinas stock market capitalization includes the ull value o listed companies, although a

substantial portion o shares a re held by the government and are not traded.

Exhibit 2

27

37

05

19

25

2000

13

24

70

60

50

40

30

20

10

0

Book valueof equity

Valuationeffect

2010

30

24

0795

8

9

1990

65

Swings in valuation levels are responsible for most of the fluctuations inglobal equity outstanding

SOURCE: Standard and Poors; Datastream; Bloomberg; McKinsey Corporate Performance Analysis Tool (CPAT); McKinseyGlobal Institute analysis

7.9

8.3

8.1

1 Calculated based on yearly country-specific market-to-book multiple.NOTE: Numbers may not sum due to rounding.

Total stockmarketcapitalization

21.2

4.9

11.7

Market-to-bookmultiple

1.8 2.2 2.9 2.3 2.4 1.8

Total global equity outstanding1


199009 200910


11

17

36

45

65

54


17/38


Global net equity issuance totaled $387 billion in 2010,the majority rom emerging markets

Global net equity issuance totaled $387 billion in 2010, down rom its peak o

$688 billion in 2009. However, global aggregates hide signiicant dierences inequity issuance between developed countries and emerging markets. In developed

countries, net equity issuance was negative rom 2005 through 2007, as the value

o share buybacks exceeded the value o new equity issues. This de-equitization

was driven by noninancial corporations. Net equity issuance in developed countries

surged in 2008 and 2009 as irmspredominantly banksreduced share buybacks

and instead raised capital to weather the storm o the inancial crisis. Share buybacks

declined rom their 2007 peak o $1.1 trillion to just $440 billion in 2009, increasing

slightly to just over $500 bill ion in 2010. In contrast to developed countr ies, net equity

issuance in emerging markets has been on the rise as companies have sought stock

market listings to signal their competitiveness and as governments began selling

portions o state-owned irms. Net issuance among emerging market companiestotaled $259 billion in 2010, with over $100 billion in both irst-time o erings and

secondary rounds o equity issuance by successul and growing emerging market

irms.

Exhibit 3

128

538

215

-308

-197

-99

Net equity issuances1

$ billion

Both developed countries and emerging markets were net equity issuersin 2010

SOURCE: Dealogic; McKinsey Corporate Performance Analysis Tool (CPAT); McKinsey Global Institute analysis

1 IPOs + secondary offerings share repurchases; covers publicly listed companies.NOTE: Split into developed countries and emerging markets based on nationality of issuer.

IPOs

Secondaryofferings

Developed countries Emerging markets

Sharebuybacks

259

15089

243

14499

35

440

943

127

657

430

167

880

517

163

1,139

669

49

738

903

129

504

506

89

77

23

136

164

57

33

87

31

80

78

8

152

120

13

20092005 2006 2007 2008 2010

63

12

47

20092005 2006 2007 2008 2010


18/38

16

Initial public oerings on emerging market exchangessurpassed those on developed country exchanges

Growth in the issuance o emerging market equities has coincided with the rise o

stock exchanges in these economies, and they are becoming increasingly importantvenues or raising capital around the world. Initial public oerings on emerging market

exchanges totaled just $11 billion in 2000. By 2007 that number had increased

to $100 billion; by 2010 the total had reached $165 billion, exceeding initial public

oerings on developed countries stock exchanges. China has been a signiicant

contributor to this growth, with its exchangesincluding Hong Kongattracting

$125 billion, or 44 percent, o total deal volume in 2010. Hong Kong, Shenzhen,

and Shanghai have become rivals to London and New York or new listings, not just

or emerging market irms but also or corporations headquartered in developed

countries. For instance, in May Glencore listed its initial public oering, one o the

largest ever or a European irm, in both London and Hong Kong. Prada listed its

shares on the Hong Kong exchange in June. Meanwhile, Coca-Cola has begunexploring a listing in Shanghai. Firms around the world are listing in Asia to take

advantage o ample capital and hungry investors.

Exhibit 4

Numberof IPOs

More than half of global IPO volume occurred onemerging market exchanges in 2009 and 2010Deal volume in different stock exchange locations$ billion

1,133 595 1,439952 824 1,432 1,622 1,802 7131,985 1,629

SOURCE: Dealogic; McKinsey Global Institute analysis

134

32

26

7282

106100

21

68

25

41 38

54

12516

21

62

22

18

40

2313

2010

New York

London

50

14

41

12235

34

126

51

126

35

11

137

26

25

174

32

56

256

47

52

299

8

29

11

59

03

83

192

115

35

13

280

4

88

Otheremerging

4

2000

China

Otherdeveloped

83

02 0401 06 07 08 09

1

05

208

3

NOTE: Numbers may not sum due to rounding.


19/38


Global debt to GDP increased rom 218 percent in 2000to 266 percent in 2010

Global debt outstanding has more than doubled over the past ten years, increasing

rom $78 trillion in 2000 to $158 trillion in 2010. Debt also grew aster than GDP overthis period, with the ratio o global debt to world GDP increasing rom 218 percent

in 2000 to 266 percent in 2010. Most o this growth$48 trillionhas been in the

debt o governments and inancial institutions. Although government debt has been

the astest-growing category, it is notable that bonds issued by inancial insti tutions

to und their balance sheets have actually been a larger class o debt over the past

ten years. Indeed, the bonds issued by inancial institutions around the world has

increased by $23 trillion over the past decade. In 2010, this shrank by $1.4 trillion

as banks moved to more stable unding sources. Nonsecuritized lending is still the

largest component o all debt and continued to grow in 2010.

Exhibit 5Growth in public debt continued in 2010, but nonsecuritized loans remainthe largest class of debt

0

5

10

15

20

25

30

35

40

45

50

04022000


Securitized loans

outstanding



Nonsecuritizedloans outstanding

20100806

Global debt1

218

77.6

Outstanding debt by asset class, 200010$ trillion, end of period, constant 2010 exchange rates

% GDP

6.5

11.7

4.7

9.7

-5.6

5.9

9.3 11.9

9.7 -3.3

242

105.5

249

123.9

235

90.3

250

141.8

266

158.1

SOURCE: Bank for International Settlements; Dealogic; SIFMA; McKinsey Global Banking Pools; McKinsey Global Instituteanalysis

1 Sum of financial institution bonds outstanding, public debt securities outstanding, nonfinancial corporate bonds outstanding,and both securitized and nonsecuritized loans outstanding.

200009 200910


$ trillion


20/38

18

On-balance-sheet loans increased by $2.6 trillion in2010, but growth diered between regions

Loans held by banks, credit agencies, and other inancial institutions account or the

largest share o global debt outstandingat 31 percent. On-balance-sheet loansgrew rom $31 trillion in 2000 to $49 trillion in 2010, an increase o 4.8 percent per

annum. However, this global total hides key dierences between regions. Since 2007,

outstanding loan volumes in both Western Europe and the United States have been

broadly lat with a decline in 2009 ollowed by a modest increase in 2010. In Japan,

the stock o loans outstanding has been declining since 2000, relecting deleveraging

by the corporate sector. Lending in emerging markets has grown at 16 percent

annually since 2000and by 17.5 percent a year in China. In 2010, loan balances

increased worldwide by $2.6 trillion. Emerging markets accounted or three-quarters

o this growth. Chinas net lending grew by $1.2 trillion, partly relecting government

stimulus eorts, while lending in other emerging markets rose by $800 billion.

Exhibit 6

17.4

5.1

2.5

4.1

15.0 12.0

18.7

5.7

5.6

1.5

-2.2 -2.4

Nonsecuritized loans outstanding1 per region$ trillion, end of period, constant 2010 exchange rates

4.7 5.9

SOURCE: Bank for International Settlements; International Monetary Fund; Standard & Poors; SIFMA; national central banks;McKinsey Global Banking Pools; McKinsey Global Institute analysis

1 Borrowings by resident households and corporations, from both domestic and foreign banks; excludes loans to other financialinstitutions and securitized loans.


On-balance-sheet lending grew by $2.6 trillion in 2010,driven by China and other emerging markets

Western Europe

Japan

United States

Other developed

China

Other emerging

2010

49.0

17.5

6.3

6.6

4.4

7.3

6.9

09

46.4

17.3

6.5

6.2

4.1

6.1

6.1

08

45.3

17.6

6.6

6.6

4.1

4.6

5.8

07

43.1

17.5

6.5

6.7

3.6

4.0

4.7

06

39.9

16.5

6.6

6.2

3.43.5

3.7

2005

37.4

15.4

6.5

6.1

3.33.03.1

2000

30.8

12.0

7.9

5.0

2.6

1.51.7

200009 200910



21/38


Issuance o securitized assets has declined sharply inthe wake o the 2008 inancial crisis

Securitized lending was the astest-growing segment o global debt rom 2000 to

2008 with outstanding volumes increasing rom $6 trillion to $16 trillionaveragegrowth o 13 percent per year. Roughly 80 percent o securitization issuance over this

period occurred in the United States. The issuance o mortgage-backed securities

by government-sponsored enterprises more than doubled between 2000 and 2007

and hit a peak in 2002 that was nearly our times as large as in 2000. The creation o

asset-backed securities by US banks and other non-government issuers tripled over

this period, as did securitization in the rest o the world albeit rom much lower levels.

Since 2008, securi tization by the US private sector and in other parts o the world has

allen dramatica lly. Only US government-supported mortgage issuers have sustained

activity in the market over the past ew yearsand new issuance in 2009 surged and

roughly matched the peak level o 2002. Future prospects in the securitization market

are unclear. Regulators are seeking to curtail the shadow banking system, whileinancia l institutions argue that securitization acilitates lending to those in need o

credit.

Exhibit 7Global securitization has dried up since 2007, apart from issues byUS government-sponsored enterprises

383

671

1,1831,651 1,663 1,276

341

482 671542

Rest of world

2010

1,998

1,707

121170

09

2,284

2,030

16392

08

1,635

1,317

185133

07

3,238

1,420

06

3,514

1,179

05

3,418

1,285

2004

2,872

1,347

2002

2,839

1,985

182

2000

1,092

558

150

US GSEs2Other United States

Global annual securitization1 issuance$ billion, nominal exchange rates

Securitized loansoutstanding$ trillion

6.0 8.0 9.4 11.5 13.7 15.3 16.1 15.4

SOURCE: Dealogic; SIFMA; McKinsey Global Institute analysis

16.3

1 Includes asset-backed securities (ABS) and mortgage-backed securities (MBS); also includes agency collateralized debtobligations (CDOs) issued by U.S. GSEs.

2 Government-sponsored enterprises, i.e., Fannie Mae, Freddie Mac, and Ginnie Mae.NOTE: Numbers may not sum due to rounding.


22/38

20

Noninancial corporate bond issues totaled $1.3 trillionin 2010, 50 percent higher than the pre-crisis level

Issuance o corporate bonds by noninancial issuers nearly doubled in 2009

compared with 2008 as bank lending standards tightened and interest ratesstayed at historic lows. Issuance totaled $1.5 trillion in 2009, with $548 bill ion in

Western Europe, a historic high. Corporate bond issuance remained high in 2010

at $1.3 trillion, more than 50 percent above 2008 levels. Given the pressures on the

banking system, those corporations that could access the capital markets directly did

so in order to secure long-term inancing. Although the majority o growth occurred in

developed countries, corporate bond issuance has also grown rapidly in recent years

in emerging economies. Chinas corporate bond issuance peaked at $151 billion

in 2009, up rom just $17 billion in 2007. Corporate bond issues are also increasing

in Brazil, Russia, and other emerging markets; their issuance reached $128 billion

in 2010. In total, emerging markets accounted or 23 percent o global corporate

issuance in 2010, up rom just 15 percent three years earlier. There is still signiicantroom or urther growth in corporate bond markets in virtually all countries outside the

United States. The United States is the only country where corporations rely on debt

capital markets to provide a sizable share o their external inancing. Bonds account

or 53 percent o corporate debt inancing in the United States compared with

24 percent in Western Europe and only 16 percent in emerging economies. Given the

higher cost o bank inancing, especially in light o new capital requirements, it would

be desirable to see a more rapid expansion o debt capital markets in Europe and in

emerging markets. This is an important issue or policy makers to address.

Exhibit 8

Nonfinancial corporate bond issuances per region$ billion

Issuance of corporate bonds remains 50 percent above its pre-crisis level

203

392

256

297

256 216

328 396 330

479

506

113

75

100 115 122

199

200

151

128

91

110

144

164

9791

95

78

10

4

1

73

6829

Otheremerging

2010

1,285

288

09

1,521

548

08

807

235

48

07

838

200

17

06

761

233

05

531

142

8

04

536

131

454

03

639

198

444

02

486

122

01

720

190

24

2000

451

156

WesternEurope

UnitedStates

Otherdeveloped

China

15

SOURCE: Dealogic; McKinsey Global Institute analysis



23/38


Government debt has increased by $9.4 trillion since2008

Government debt has increased signiicantly. There was some growth between 2000

and 2008, but the amount o government debt has jumped in 2009 and 2010. Publicdebt outstanding (measured as marketable government debt securities) stood at

$41.1 trillion at the end o 2010, an increase o nearly $25 trillion since 2000.13 This was

the equivalent o 69 percent o global GDP, 23 percentage points higher than in 2000.

In just the past two years, publ ic debt has grown by $9.4 trillionor 13 percentage

points o GDP. In 2010, 80 percent o the growth in total debt outstanding came rom

government debt. While stimulus packages and lost revenue due to anemic growth

have widened budget deicits since the crisis, rising global public debt also relects

long-term trends in many advanced economies. Pension and health care costs are

increasing as populations age, and ununded pension and health care liabilities

are not relected in current government debt igures. Without iscal consolidation,

government debt wil l continue to increase in the years to come.

13 There is no single methodology or measuring government debt. Our data do not include

intragovernmental holdings, which some other organizations, such as the International

Monetary Fund, include.

Exhibit 9Global public debt has increased by $24.6 trillion overthe last decade, reaching 69 percent of GDP in 2010

70

65

60

55

50

45

0

+3+23

2000 05 0895 20101990

40

SOURCE: Bank for International Settlements; McKinsey Global Institute analysis

Publicdebt total$ trillion

8.9 16.5 25.412.8 31.7 41.1

1 Defined as general government marketable debt securities; excludes government debt held by government agencies(e.g., US Social Security Trust Fund).

Gross outstanding public debt1 as % of GDP%, end of period, constant 2010 exchange rates

Growth(percentage points)


24/38

22

Government debt in many developing countries hasrisen to unprecedented levels

In the 1970s, 1980s, and 1990s, there were numerous sovereign debt crises in

emerging markets that proved very costly in terms o lost output, lower incomes,and years o slower economic growth.14 But today it is developed country

governments that must act to bring their growing public debt back under control. In

most emerging markets, public debt has grown roughly at the same pace as GDP

since 2000 and the ratio o government debt to national GDP remains rather small.

In contrast, the United States, Japan, and many Western European governments

have seen their debt rise signiicantly. Japans government debt began rising

ater its inancial crisis in 1990 and has now reached 220 percent o GDP. In both

the United States and Western Europe in 2010, the ratio o public debt grew by

9 percentage points to stand at more than 70 percent o GDP by the end o the year.

With budgets under pressure rom both short-term crisis-related measures and long-

term pressures on growth and calls on the public purse (including aging populationsin many countries), developed countries may need to undergo years o spending cuts

and higher taxes in order to get their iscal house in order.

14 See Debt and deleveraging: The global credit bubble and its economic consequences,

McKinsey Global Institute, January 2010 (www.mckinsey.com/mgi); Carmen M. Reinhart and

Kenneth Rogo, This time is dierent: Eight centuries o fnancial olly, Princeton University

Press, 2009.

Exhibit 10Governments in many developed economies havesteadily increased public debt over the last ten years

SOURCE: Bank for International Settlements; McKinsey Global Institute analysis

10

22

22

28

37

24

39

48

42

78

Western Europe

Japan

CEE and CIS2

United States

China

Latin America

Other Asia

Other developed

Middle Eastand Africa

India

29

25

25

32

42

44

50

63

67

191

29

28

29

34

38

43

49

72

76

220 11.6

11.1

10.4

2.3

1.5

0.6

0.3

1.0

1.6

0.7

15.1

13.4

14.2

-2.0

-9.5

6.3

16.0

12.0

0.0

-2.3

Gross public debt outstanding1 per region

1 Defined as general government marketable debt securities; excludes government debt held by government agencies(e.g., US Social Security Trust Fund).

2 Central and Eastern Europe and Commonwealth of Independent States.

Developed

Emerging

2000 2009 2010

% of regional GDP, end of period $ trillion(constant 2010exchange rates)

Compoundannual growthrate, 200910 (%)


25/38


Global bank deposits increased by 5.6 percent in 2010

Global bank deposits have grown slightly aster than GDP over the past ten years

and have increased rom 80 percent o GDP in 2000 to 90 percent o GDP at the end

o 2010. Among developed countries, deposits grew astest in the United States,increasing rom $5 trillion in 2000 to $11 trillion in 2010. This relected the growing

share o household inancial assets held in cash rather than bonds or equity

sharesa reversal o trend rom previous yearsas well as rising corporate

cash balances. Western European and Japanese deposits grew more slowly as

households there have traditionally held more o their wealth in the orm o deposits

rather than other types o inancial assets. Deposits in China and other emerging

markets continued their strong growth into 2010, rising 13.6 percent in aggregate

to reach $14.5 trillion. Deposit growth in all these countries is the result not only

o years o strong GDP growth and economic development but also the act that most

emerging market households have ew alternatives or their investments. Financial

systems, not least banking, are underdeveloped in many o these countries. Thereare an estimated 2.5 billion adults in emerging markets with discretionary income who

are not part o the ormal inancial system.15 Bank deposits are likely to continue to

grow as household incomes rise and individuals open savings accounts.

15 See Alberto Chaia, Tony Goland, and Robert Schi, Counting the worlds unbanked,

McKinsey Quarterly, March 2010; Alberto Chaia et al, Hal the world is unbanked, The Financial

Access Initiative, October 2009.

Exhibit 11

Bank deposits grew by 5.6 percent to total $54 trillion globally by the endof 2010Global bank deposits1


200009 200910


1 Excludes cash in circulation, money market instruments, and deposits made by nonbank financial institutions with other partsof the banking system.


SOURCE: National central banks; McKinsey Global Banking Pools; McKinsey Global Institute analysis

14.0

8.1

8.6

5.2

16.4 14.5

12.4

7.6

3.6

2.1

0.6 0.9

6.6 5.6

WesternEurope

Japan

UnitedStates

Otherdeveloped

China

Otheremerging

2010

53.8

11.8

10.7

11.0

5.7

8.3

6.2

09

50.9

11.6

10.6

10.6

5.3

7.2

5.5

08

47.8

11.4

10.4

10.1

5.0

5.7

5.2

07

44.7

10.8

10.3

9.9

4.6

4.7

4.4

06

41.2

10.0

10.3

8.8

4.2

4.2

3.6

05

38.3

9.4

10.2

8.1

3.93.73.1

2000

28.6

7.3

10.0

5.0

2.61.8

1.7

83 83 83 8480Deposits% of GDP

91 90


26/38

24

Emerging markets account or 18 percent o the globalinancial stock, but their share has tripled since 2000

Today, developed countries account or the vast majority o the capital raised

through equity and debt worldwide. However, emerging markets are catching up. In2010, US households, corporations, and governments accounted or 32 percent o

outstanding debt and equity worldwide at $67.5 trillion. The economies o Western

Europe combined accounted or $63.6 trillion, or about 30 percent o the global

total. Japan and other developed economies accounted or roughly 20 percent o

the worlds debt and equity outstanding. Turning to emerging markets, households,

corporations, and governments had outstanding debt and equity o just $37.1 trillion,

or 18 percent o the global total, at the end o 2010. This is ar below their share o

global GDP o 32 percent. However, emerging markets share o the global inancial

stock has tripled since 2000 as their inancial systems improve and as the largest

corporations and governments tap oreign investors.16 China accounts or 43 percent

o the emerging market share, but almost all emerging market regions have seen theirinancial stock grow aster than their developed counterparts. In the case o China,

its inancial stock has grown our times as ast as that o Western Europe and the

United States.

16 For more on investment in inrastructure, real estate, and other physical assets in emerging

markets, see Farewell to cheap capital? The implications o long-term shits in global saving

and investment, McKinsey Global Institute, December 2010 (www.mckinsey.com/mgi).

Exhibit 12

Stock of debt and equity outstanding, 20101

% of total, end of period

2.4

5.2

5.2

8.2

Japan

United States

Western Europe

Other developed

Other Asia 11.9

Latin America 15.2

Middle Eastand Africa

15.8

CEE and CIS2 20.5

China 20.8

India 23.0

7.6

Other Asia

1.3

India

1.5

Middle East and Africa

2.0

CEE and CIS2

2.5Latin America

2.7China

Other developed 8.7

Japan11.7

Western Europe

30.1

United States31.9

Developed countries

Emerging markets

1 Based on a sample of 79 countries.2 Central and Eastern Europe and Commonwealth of Independent States.

SOURCE: Bank for International Settlements; Dealogic; SIFMA; S&P; McKinsey Global Banking Pools; McKinsey GlobalInstitute analysis

Emerging markets account for the smallest sharebut also the fastest growth in the global financial stock

Stock of debt and equity outstanding, 20101

End of period100% = $212 million

Compound annual growth rate, 200010%


27/38


The composition o unding sources varies acrosscountries

The depth o a countrys inancia l marketsmeasured as the value o outstanding

bonds, loans, and equity relative to the countrys GDPreveals the extent to whichcorporations, households, and governments can und their activities through

inancia l intermediaries and markets. Today, developed countries have much

deeper inancial markets than those ound in emerging markets. Financial depth in

the United States, Japan, Western Europe, and other developed countries is near

or above 400 percent o GDP, compared with 280 percent in China and around

200 percent or less in other emerging markets. Comparing the components o

inancia l depth across countries reveals that even those with the same level o

inancial depth can inance themselves in very dierent ways. For example, nearly hal

o Japans inancial depth is due to the size o its huge government bond market

taking that market out o the equation would leave Japan with a lower inancial depth

than that o China. Corporate bond and securitization markets are largest in theUnited States, while Western Europe relies much more heavily on traditional bank

loans or inancing. Emerging markets und themselves mainly through bank lending

and equity markets. Bond markets account or a much smaller share o their inancial

markets overall, except or Latin America.

Exhibit 13

Financial depth, year end 20101

Percent; % of regional GDP

The structure of capital and banking markets varies widelybetween countries

1 Calculated as total regional debt and equity outstanding divided by regional GDP.2 Central and Eastern Europe and Commonwealth of Independent States.

25

7

29

12

6

14

16

48

18

13

10

21 8

2026

17

26

16 17

3935

4451

37 3934

1

2

655

7

4

Nonsecuritized loansoutstanding






CEE andCIS2

142

44

1

LatinAmerica

148

18

2 2

OtherAsia

168

32

14

MiddleEast andAfrica

190

35

3 3

India

209

29

0 3

China

280

45

14

Otherdeveloped

388

23

7

400

28

4

Japan

457

23

WesternEurope

4

UnitedStates

462

10

17

100% =

2



28/38

26

Emerging markets have ample room to deepen theirinancial systems

Despite rapid growth in the inancial stock o emerging markets over the past decade,

there is still ample room or urther growth. One reason is that the developmento inancial markets is associated with higher incomes and a greater degree o

economic development. Most emerging markets inancial depth is between 50

and 250 percent o GDP compared with 300 to 600 percent o GDP in developed

countries. As emerging economies evolve, it is likely that their inancial markets

will develop, too. Well-unctioning capital and banking markets make it easier or

households, corporations, and governments to raise unds or investment. Greater

economic output means more excess revenue and income can be invested in capital

markets and deposited in banks in order to inance even more productive activity.

However, the degree to which inancial deepening occurs in many o these countries

will depend crucially on whether they have the right regulatory and institutional

ramework to channel unds to their most productive use. Countries can have verydierent inancial depth even at the same level o income. For instance, Norway

has higher per capita GDP than the Netherlands, but its inancial markets are hal

as deep. This relects the act that Norway generates large oil revenues but the

corporate sector outside minerals is relatively small. In emerging markets, we see that

China, Malaysia, and South Arica have a much higher inancial depth than do other

countries at similar income levels and are roughly on a par with much richer countries

including Belgium and Canada.

Exhibit 14Financial markets in developing countries still havesignificant room for growth

0

50

100

150

200

250

300

350

400

450

500

550

600

650

Libya

Latvia

South Korea

Colombia

Bosnia and Herzegovina

Czech Republic

Austria

Belgium

Russia

Romania

Portugal

PolandPhilippines

China

Canada

CroatiaFinland

Denmark

Spain

South Africa

Slovenia

Singapore

Saudi Arabia

Netherlands

Mexico

Malaysia

Australia

Brazil

Tunisia

Thailand

Taiwan

Switzerland

Sweden

India

Hungary

Greece Germany

France

Vietnam

United States

United Kingdom

Ukraine Turkey

Kenya

Japan

Italy

Ireland

IndonesiaPeru

Norway

Nigeria

New ZealandMorocco

Argentina

Lithuania

8,5003,0000

Financial depth1

% of GDP

Per capita GDP at purchasing power parity$ per person, log scale

55,00023,000

2010, end of period

SOURCE: Bank for International Settlements; Dealogic; SIFMA; Standard & Poors; McKinsey Global Banking Pools; McKinseyGlobal Institute analysis

1 Calculated as a countrys debt and equity outstanding divided by countrys GDP.

Emerging

Developed

Deep

erfinancialmarkets


29/38


Cross-border capital lows have started to recover butstill stand at only 40 percent o their record level in 2007

One o the most striking eatures o global capital markets over the past two decades

has been the rise and all o cross-border capita l lowsincluding oreign directinvestment (FDI), purchases o oreign equities and debt securities, and cross-

border lending and deposits. From 1994 to 2007, cross-border capital lows grew

on average by 23 percent each year. Over this period, these lows increased rom

4 percent o global GDP to 20 percent. Increased stability in emerging markets has

attracted capital rom developed country investors, while the creation o Europes

Economic and Monetary Union has acilitated the low o capital within Western

Europe. However, cross-border capital lows collapsed in 2008 as investors became

more cautious and banks became more reluctant to lend international ly. Total capita l

lows decl ined rom $10.9 trillion in 2007 to only $1.9 trillion in 2008a decrease o

83 percent in a single year. Global capital lows declined even urther in 2009, totaling

only $1.6 trillion over the course o the year. There was a rebound in 2010 when capitallows totaled $4.4 trillion. However, this was only 40 percent o record capital lows in

2007, indicating that the recovery o the global inancial system is ar rom complete.

Exhibit 15

12

10

8

6

4

2

0

+2.8

4.4

1.6

10.9

2005

7.1

-9.2

20102000

4.7

1995

1.5

1990

0.9

1985

0.5

1980

0.4

Cross-border capital flows grew to $4.4 trillion in 2010, or 40 percent oftheir 2007 level

% of globalGDP

4 5 6 134 15 8


1 Inflows defined as net purchases of domestic assets by nonresidents (including nonresident banks); total capital inflowscomprised of inward FDI and portfolio (e.g., equity and debt) and lending inflows.

2 Based on a sample of 79 countries.

Total cross-border capital inflows, 198020101,2

$ trillion, constant 2010 exchange rates


30/38

28

Cross-border lending accounted or 60 percent o thedecline in total capital lows since 2007

The $6.5 trillion decline in cross-border capital lows rom their 2007 peak has been

the result o a reduction in most categories. The collapse o the international lendingmarket, speciically the interbank lending in Western Europe, explains the majority

o the decline in annual capital lows between 2007 and 2010. Cross-border lending

was actually negative in 2008 and 2009 as banks brought their capital back home.

The growth in capital lows in 2010 relects the recovery o this international interbank

market, but total lending lows are still only 25 percent o their peak 2007 level.

Investment in other categories o developed country capital lows also remain below

their 2007 level. Foreign purchases o their debt securities in 2010 were $1.2 trillion

less than their peak in 2007, while irms FDI was $1.6 trillion lower than it was in 2007.

Across countries, we see that the majority o the decline occurred in capital lows

between mature economiesan $800 billion reduction in capital lows to emerging

markets accounts or only 12 percent o the overall decline. Continued instabili ty andlow returns in developed countries combined with strong uture growth prospects in

emerging markets have prompted oreign investor interest in emerging markets.

Exhibit 16A decline in cross-border lending, particularly Western Europeaninterbank lending, explains the difference in capital flows between2007 and 2010


Global cross-border capital inflows, 200710$ trillion, constant 2010 exchange rates

Lending

Debt securities

Equity securities

Foreign directinvestment

Total 2010

4.4

1.3

1.5

0.70.9

Lending

-3.8

Debtsecurities

-1.1

Equitysecurities

-0.3

Foreign directinvestment

-1.3

Total 2007

10.9

5.2

2.6

0.9

2.2

61 percent ($2.3 trillion)of total decrease inlending due to decline

in Western Europeaninterbank lending

% of total decline 20 604 16



31/38


Capital lows to developed countries are 20 percentmore volatile than lows to emerging markets

Quarterly data highlight the volatility o cross-border capital lows. But contrary to

conventional wisdom, lows to developed countriesnot emerging marketsare themost volatile. Capital lows to emerging markets averaged $226 billion per quarter

rom 2000 through 2010, peaking at $520 billion during 2005 and 2006. Capital

lows to developed countries were much higher, averaging $1.1 trillion per quarter.

However, these lows were much more volatile, with a high o $3.4 trillion in the irst

quarter o 2007 and a low o minus $2.0 trillion in the inal quarter o 2008. Overall,

we calculate that capital lows to developed countries, adjusted or their size, are

20 percent more volatile than lows to emerging markets. We can partly explain

this dierence in volatility by comparing the composition o capital lows between

developed countries and emerging markets. From 2000 to 2010, FDI, the least volatile

type o low, comprised 53 percent o total capital lows to emerging markets. But in

developed countries, highly volatile cross-border lending lows are the largest type ocapita l low.

Exhibit 17Capital flows to emerging markets are smaller but more stable thanflows to developed countries


Cross-border capital inflows to developed countriesand emerging markets, Q1 2000Q4 2010$ trillion, constant 2010 exchange rates

35

8

13

10

21

53

Interbanklending

Lending tononbanksectors

Debtsecurities

Equitysecurities

FDI

Emerging

6.7

7

22

Developed

48.3

19

12

100% =

Composition of total inflows,200010%; $ trillion(constant 2010 exchange rates)

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Q1 2000 Q1 2002 Q1 2004 Q1 2006 Q1 2008 Q1 2010

Developed

Emerging


32/38

30

Emerging markets were net capital exporters in 2010with $922 billion o outlows, 31 percent more thaninlows

Foreign capital lows into emerging markets totaled $702 billion in 2010. This was

only hal o their peak o $1.5 trillion in 2007 but our times their level o 2000. Flows

to Latin American countr ies surged in comparison with the previous year to a total

o $254 billion. Flows to the Commonwealth o Independent States (CIS) were

second-largest among developing economies at $97 billion and lows to China the

third-largest at $84 billion. O the total capital lows to emerging markets, oreign

direct investment accounted or the largest share at 36 percent, ollowed by oreign

purchases o debt securities (27 percent), cross-border lending (23 percent), and

oreign purchases o equity securities (14 percent). While these lows relect strong

undamentals in many emerging market regions, they have has also stoked ears o

asset bubbles, unwanted exchange-rate appreciation, and overheatingin Brazil,

or instance. At the same time, emerging markets are becoming an increasingly

important source o oreign capital. Emerging markets were net capital exporters

in 2010, as outlows totaled $922 bill ion, 31 percent more than inlows. About

55 percent o this capital outlow came rom central bank purchases o oreign-

exchange reserves. However, emerging market corporations are now a growing

source o FDI, reaching $159 billion in 2010.

Exhibit 18

Capital outflows from emerging markets remained significant even afterthe crisis, totaling $922 billion in 2010Cross-border capital flows to and from emerging markets, 2010$ billion


76

50

42

73

27

32

60

44

17

50

65

17

-37

42

1

4

4

8

-21

-9 -14

61-16

2715

132

61

405382

127

17340

60

21

79

50

22

35

1

11

1

6

16

6

2

-10

-4

Sub-SaharanAfrica

189

Middle East andNorth Africa

26812

India 67

Other emergingAsia

7723 25

36 45 12-14

China 8427

Commonwealth ofIndependent States

9713 28

Latin America 25459 76

Central andEastern Europe

79

7

Inflows Outflows

Lending Debt Equity FDI Reserves FDI Other



33/38


Global oreign investment assets hit a historical high o$96 trillion in 2010

Relect ing growth in global capital lows, the worlds stock o oreign investment

assets also increased in 2010. Global oreign investment assets reached a historicalhigh o $96 trillion in 2010, nearly ten times the amount in 1990. Central bank oreign

reserves were the astest-growing component, reaching $8.7 trillion by the end

o 2010, a sizable share (9 percent) o the worlds inancial stock that is invested

in government bonds and other low-risk securities. Foreign direct investment

assets o companies reached a new high o $21 trillion, as did the stock o oreign

debt securities held by institutional and private investors. Banks expanded their

international lending, with the stock o cross-border loans returning to its 2007 level

at $31 trillion. The degree to which inancial integration will continue into 2011 and

beyond will depend not only on international macroeconomic prospects but also

on the international regulatory ramework still under construction in response to the

2008 inancial crisis.

Exhibit 19

Equitysecurities

FDI

Foreignreserves

2010

96

31

21

14

21

9

09

91

29

19

14

20

8

08

78

28

16

9

17

7

07

91

31

19

17

18

7

06

78

25Loans

Debtsecurities

17

15

15

5

2005

62

20

14

11

12

5

2000

35

13

6

7

82

95

16

732

3 1

1990

10

61 1

21

Global FIA% of globalGDP

Global foreign investment assets (FIA)1


18.0

10.9

8.1

9.8

13.4

11.0


9.1

4.0

3.6

7.2

6.3

5.9

1 Based on a sample of 79 countries.NOTE: Numbers may not sum due to rounding.

The stock of global foreign investment assets reached $96 trillion in 2010

55 66 107 134 156 170 138 162 161

200009 200910



34/38

32

The global web o cross-border investments in 1999centered on the United States and Western Europe

Global inancial integration began in earnest in the 1990s. Companies rom

developed countriesand particularly the United Statesbegan to invest abroad,and investors sought to diversiy their por tolios internationally. By the end o 1999,

the stock o oreign investment assets had already become signi icant, reaching

$28 trillion, or 79 percent o global GDP. The largest cross-border ties were between

the United States, Western Europe, and to a lesser extent Japan. At that time, the

United States was partner to 50 percent o all outstanding international inancial

positions. Linkages to emerging marketsChina, other parts o emerging Asia,

Latin America, and Central and Eastern Europewere small, in most cases less

than $1 trillion. Investors in developed countries had limited inormation on emerging

market opportunities and, ater the 1997 Asian inancial crisis, eared potential

macroeconomic and political instability. Investors in emerging markets had limited

access to inancial markets in other parts o the worldin act, many emergingmarkets lacked even a domestic inancial system that acilitated an outlow o capital

by companies and households.

Exhibit 20aIn 1999, cross-border investing was taking hold

35%($1.01.8)

0.51%($0.20.4)

510%($1.83.5)

10%+($3.5+)

13%($0.41.0)


1 Includes total value of cross-border investments in equity and debt securities, loans and deposits, and foreign directinvestment.

Figures inside bubbles are regional financial stockLines between regions show total cross-border investments1

Total value of cross-border investmentsbetween regions% of world GDP($ trillion)

World GDP, 1999 =$35 trillion

Total domesticfinancial assets,1999 ($ trillion)

Japan

LatinAmerica

Middle East, Africa,and Rest of World

NorthAmerica

Australia andNew Zealand

Other Asia

Russia andEastern Europe

WesternEurope

22.7

1.8

1.7

40.8

0.5

7.0

Documents

McKinsey's Mapping Global Capital Markets 2011