Emerging-market households are becoming a powerful new investor class, and their investment choices will help determine global demand for different asset classes. An McKinsey study finds that the financial assets holdings of investors in developing nations has grown at triple the rate of assets in developed nations. This has raised their share of global financial wealth from 7% to 21% percent over the past 10 years. By the end of this current decade, they will hold as much as 36% of global financial wealth – between $114 trillion and $141 trillion.
A Shift from Equities to Deposit Accounts
While investors in Europe, the United States, and wealthier parts of Asia, such as Hong Kong, hold 30% to 40% of their financial assets in equities, new investors in emerging economies keep 75% in deposit accounts. The likely result is a shift in the global allocation of financial assets away from equities toward deposits and fixed-income instruments during this decade. This shift could be accelerated by aging and other trends, dampening investor appetite for equities. Equities could decline from 28% of global financial assets in 2010 to 22% in 2020.
Volatility, Debt and Global Sourcing
This shifting pattern of global wealth will create opportunities and challenges for the asset management industry and for investors.
Supply and Demand Imbalance: While total investor demand for equities will grow, it will still fall short of what corporations need by $12.3 trillion. The supply and demand imbalance for equity will be most pronounced in emerging economies, where companies need significant external financing for growth, and in Europe, where allocations to equity are already falling, although the need for additional equity is rising for banks to meet capital requirements. In the US and some other mature economies, investor demand for equities will probably still exceed what companies will need, since companies can also generate sufficient profits to finance their growth.
Volatility and Debt: As global markets adjust to close the supply and demand gap, it will result in a higher cost of equity, prompting many firms to use less equity and more debt to fund growth. At a time when the global economy is struggling to recover from the credit bubble collapse, greater use of debt—whether from banks or through capital markets—could have negative implications. Higher leverage increases the risk of bankruptcy and economic volatility and makes the world economy more vulnerable to shocks.
Higher Finance Cost: Many companies are likely to find that they are unable to raise enough equity in their home countries or can do so only at high cost. European Banks, facing weak investor demand for equities, may find it challenging to find buyers for the equity capital they need to raise, and may have to list in markets where investors’ demand for equities is strong, or through private placements.
Global Marketing Challenges: Asset managers will need an increasingly global reach to cultivate the emerging investor classes of Asia and other regions, which will require tailored products to fit their preferences and budgets. In mature markets, aging and low returns present growth challenges. However, the industry can also profit by educating investors about the financial implications of longer life spans, including the need to get higher returns over a longer period.
Lower Investor Returns: For investors, it will be more challenging to meet savings goals, since almost all ten-year periods in the modern era (except in Japan) equities have generated significantly higher real returns than bonds. Savings will need to increase. This will also boost long-term growth.
Financial Services Marketing Challenges
There will be increased opportunities for financial services providers to address unmet consumer needs through vehicles such as voluntary savings plans. Market volatility will require increased attention to consumer asset allocation education and compliance. Increased focus on improving consumer marketing and education, including better systems for online, in-person enrollment, and telephonic customer support, will be more important, especially considering the rise of the Millennial Generation in the workforce, and their lower benefit participation rate.
Snap Principle of the New Decade of Financial Marketing:
Improve your service marketing and delivery.