Last updated: 12:50 / Wednesday, 16 July 2014
Credit Suisse Report

China will Advance Ahead of Both the UK and Japan to Become the Second Largest Equity Market by 2030

China will Advance Ahead of Both the UK and Japan to Become the Second Largest Equity Market by 2030

For the most part, emerging nation capital markets remain underdeveloped relative to the size of their economies, despite rapid growth in capital-raising over the past two decades. Emerging markets have a 39% share of global output (or 51% on a purchasing power parity basis) and yet account for only 22% of global equity market capitalization and a 14% share of both corporate and sovereign bond market value, respectively.

Credit Suisse believes this gap will close, driven by a disproportionately large contribution from emerging equity and corporate bond supply (as company capital structures benefit increasingly from lower financing costs via disintermediation of bank loans) and demand (driven by growth in domestic mutual, pension and insurance funds), given relatively high savings ratios prevalent among emerging economies.

In 2030, the United States will retain its ranking as the largest global equity market with a (nominal dollar) capitalization of USD 98 trillion, with a weight of 34.6% (representing a USD 74 trillion gain since 2014), while China advances ahead of both the UK and Japan to become the second largest equity market with a USD 54 trillion capitalization and a weight of 18.9% (representing a USD 50 trillion nominal gain from 2014).

In the proprietary study of Credit Suisse Research Institute “Emerging Capital Markets: The Road to 2030”, the firm extrapolates established historical patterns of growth in emerging and developed capital markets to assist in projecting their absolute and relative dimension and composition of market value by the year 2030.

And Credit Suisse finds a strong relationship between the historical expansion of developed nation aggregate equity and corporate bond market value relative to GDP and gains in economic productivity, and thus using long-term projections of per capita GDP, they are able to make projections for both emerging and developed market equity and fixed income issuance over the 17 years to 2030. And they go on to calculate implied underwriting fees and commissions from primary and secondary capital market activity and then apportion future emerging market equity and fixed income deal revenue between emerging and developed market-domiciled financial services companies employing the evolving observed trends in allocation.

As a result, Credit Suisse estimates that the market value for emerging equities, corporate and sovereign bonds will increase by USD 98 trillion, USD 47 trillion and USD 17 trillion, respectively, in nominal dollar terms between 2014 and 2030, versus gains of USD 125 trillion, USD 52 trillion and USD 24 trillion, respectively, for these asset classes in the developed world.

Hence, the company projects that, by 2030, the emerging market share of global equities will increase to 39%, for corporate bonds to 36% and for sovereign bonds to 27%. Emerging markets may understandably retain their aggregate equity skew toward resources, given their collective characteristic as a net commodity exporter; however, over the duration out to 2030, there will likely be a normalization toward more under-represented industry sectors relative to the developed world, particularly healthcare, industrials and consumer discretionary.

They examine the capacity for growth in assets under management of emerging market domestic mutual, pension and insurance funds to 2030 to absorb incremental equity, corporate and sovereign bond issuance. In total, they forecast this to be USD 6 trillion for equities, USD 16 trillion for corporate bonds, and USD 17 trillion for sovereign bonds.

For the most part, they do not foresee the required development of domestic institutional investment assets under management acting as a hurdle to our forecasts for equity and new bond issuance to 2030. Additionally, sustained foreign portfolio inflows will maintain a further source of demand for emerging market equities and bonds. Should the pace of gross portfolio flows into emerging markets continue to average 1.2% of GDP until 2030, then the cumulative inflows into emerging markets over the duration would amount to USD 10 trillion.

To see the report “Emerging capital markets: the Road to 2030,” use this link.