Sunday, December 11, 2011

The emerging equity paradigm shift

A Mckinsey Global Institute report has suggested that the roles of equities in the asset allocation of investors/house-holds will shrink from 28% during 2010 to 22% in 2020, a sharp 6% fall in 10 years that will characterize the next decade as one of less risk taking capabilities, and household and investor fear for complicated securities that are dealt on stock exchanges, which have daily fluctuation in values.

It has been widely seen in the past 2 years that many investors have lost large amounts of their capital, and this loss is deeply engrained in another loss : their risk taking capacity. The growth in emerging economies and the inadvertent aging of the general population will be the reason for this 6% shift from equities to cash, demand deposits and fixed income securities like bonds.

Accordingly, Mckinsey follows up with :

The potential equity gap, modeled on detailed data from 10 mature economies and eight emerging ones, would be seen largely in emerging market economies, but would also appear in some European nations. This has important implications for economic growth, how companies fund themselves, and how investors with lower holdings of equity can reach their saving goals.
However total investment demand for equities will continue to grow in the forthcoming decade, but its share in the total asset allocation will fall, that is, demand for fixed income securities will rise faster. This imbalance will affect the external financing requirement for growth in emerging economies' corporates.

Conversely a few developed countries like USA will remain unaffected due to sufficient profits adding to the reserves, and hence preventing external financing.

The above trend that Mckinsey points out is already evident in Europe, where the need for additional equity is rising for banks so that they can meet current and new capital requirements.

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