McKinsey Report PDF

Updated research
McKinsey Global Institute

Mapping global capital
markets 2011
Charles Roxburgh
Susan Lund
John Piotrowski
August 2011
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Copyright McKinsey & Company 2011
The McKinsey Global Institute
The McKinsey Global Institute (MGI), the business and economics research
arm of McKinsey & Company, was established in 1990 to develop a deeper
understanding of the evolving global economy. Our goal is to provide leaders in
the commercial, public, and social sectors with the facts and insights on which
to base management and policy decisions.
MGI research combines the disciplines of economics and management,
employing the analytical tools of economics with the insights of business
leaders. Our micro-to-macro methodology examines microeconomic
industry trends to better understand the broad macroeconomic forces affecting
business strategy and public policy. MGIs in-depth reports have covered more
than 20 countries and 30 industries. Current research focuses on four themes:
productivity and growth; the evolution of global financial markets; the economic
impact of technology and innovation; and urbanization. Recent reports have
assessed job creation, resource productivity, cities of the future, and the impact
of the Internet.
MGI is led by three McKinsey & Company directors: Richard Dobbs, James
Manyika, and Charles Roxburgh. Susan Lund serves as director of research.
Project teams are led by a group of senior fellows and include consultants from
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network of partners and industry and management experts. In addition, leading
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The partners of McKinsey & Company fund MGIs research; it is not
commissioned by any business, government, or other institution. For further
information 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 offers readers refreshed data and analysis from
our September 2009 report Global capital markets: Entering a new era.
In this update, we examine how the worlds financial markets are recovering
after the 2008 financial crisis. We offer new data for more than 75 countries
on the growth and composition of their financial stock, cross-border capital
flows, and foreign investment assets and liabilities. We discuss implications for
businesses, policy makers, and financial institutions, and we invite others to
contribute to this dialogue.
In Fall 2011, MGI will release a full update to the January 2010 report Debt and
deleveraging: The global credit bubble and its economic consequences.
1 Mapping global capital markets 2011
Mapping global financial markets
2011
The 2008 financial crisis and worldwide recession halted an expansion of global
capital and banking markets that had lasted for nearly three decades. Over the
past twoyears, growth has resumed. The total value of the worlds financial stock,
comprising equity market capitalization and outstanding bonds and loans, has
increased from $175trillion in 2008 to $212trillion at the end of 2010, surpassing the
previous 2007 peak.
1
Similarly, cross-border capital flows grew to $4.4trillion in 2010
after declining for the previous twoyears.
Still, the recovery of financial markets remains uneven across geographies and asset
classes. Emerging markets account for a disproportionate share of growth in capital
raising as mature economies struggle. Debt markets remain fragile in many parts of
the world, and the growth of government debt and of Chinese lending accounts for
the majority of the increase in credit globally.
In this research update, we provide a fact base on how the worlds financial markets
are recovering.
2
We draw on refreshed data from three proprietary McKinsey Global
Institute (MGI) databases that cover the financial assets, cross-border capital flows,
and foreign investments of more than 75 countries through the end of 2010. These
data provide a granular view of the growth in the worlds financial markets and asset
classes. The goal of this paper is to provide an overview of the key trends and share
preliminary thoughts on their implications. We invite others to add to this discussion
and draw out specific implications for different actors within the global financial
system. Among our key findings are these:
The global stock of debt and equity grew by $11trillion in 2010. The majority of this
growth came from a rebound in global stock market capitalization and growth in
government debt securities.
The overall amount of global debt outstanding grew by $5trillion in 2010, but
growth patterns varied. Government bonds outstanding rose by $4trillion, while
other forms of debt had mixed growth. Bonds issued by financial 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
$1.2trillion of net new lending in 2010 and other emerging markets adding
$800billion.
3
Cross-border capital flows grew in 2010 for the first time since 2007, reaching
$4.4trillion. These flows remain 60percent 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 of 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 refers to the mainland of the country, excluding Hong Kong,
which we treat separately.
2
dramatic reduction in interbank lending as well as less direct investment and fewer
purchases of debt securities by foreign investors.
The worlds investors and companies continue to diversify their portfolios
internationally, with the stock of foreign investment assets growing to $96trillion.
After twoyears of decline, global imbalances are once again growing. The US
current account deficitand the surpluses in China, Germany, and Japan that
helped fund 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 of equity and debt rose by $11trillion in 2010, reaching a total of
$212trillion.
4
This surpassed the previous peak of $202trillion in 2007 (ExhibitE1).
Nearly half of this growth came from an 11.8percent increase ($6trillion) in the market
capitalization of global stock markets during 2010. This growth resulted from new
issuance and stronger earnings expectations as well as increased valuations. Net
new equity issuance in 2010 totaled $387billion, the majority of which came from
emerging market companies. Initial public offerings (IPOs) continued to migrate to
emerging markets, with 60percent of IPO deal volume occurring on stock exchanges
in China and other emerging markets.
4 This includes the capitalization of global stock markets; the outstanding face values of bonds
issued by governments, corporations, and nancial institutions; securitized debt instruments;
and the book value of loans held on the balance sheets of banks and other nancial
institutions.
Exhibit E1
Global financial stock has surpassed pre-crisis heights,
totaling $212 trillion in 2010
11
19
29
35
41
41
44
42
13
16
25
28
30
32
37
41
11
17
36
45
55
65
34
48
54
3
2
10
3
3
8
9
212
49
15
09
201
47
16
9
08
175
45
16
8
07
202
43
15
8
06
179
40
Nonsecuritized loans
outstanding
14
7
05
155
38
11
6
2000
114
Securitized loans
outstanding
6
5
95
72
24
1990
54
31
Nonfinancial corporate
bonds outstanding
Financial institution
bonds outstanding
Public debt securities
outstanding
Stock market
capitalization
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
321 334 360 376 309 356 356 263 261
Global stock of debt and equity outstanding
1
$ trillion, end of period, constant 2010 exchange rates
Financial
depth
2
(%)
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 annual
growth rate
%
Credit markets struggle while government debt soars
Global credit markets also grew in 2010, albeit more unevenly.
5
The total value
of all debtincluding bonds issued by corporations, financial institutions, and
governments; asset-backed securities; and bank loans held on balance sheets
reached $158trillion, an increase of $5.5trillion from the previous year. Government
debt grew by 12percent and accounted for nearly 80percent of net new borrowing,
or $4.4trillion. This reflected large budget deficits in many mature economies,
amplified by a slow economic recovery. Government debt now equals 69percent of
global GDP, up from just 55percent in 2008.
Bond issues by nonfinancial businesses remained high in 2010 at $1.3trillionthats
more than 50percent above the level prior to the 2008 crisis. This reflected 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 of loans held on the balance
sheets of financial institutions rising by $2.6trillion (5.9percent). Emerging markets
accounted for $2trillion of this growth with China alone contributing $1.2trillion.
Bank lending grew by $300billion in both the UnitedStates and Western Europe
(5.6and 1.5percent, respectively) and by $200billion in other developed economies.
However, bank loans shrunk by $200billion in Japan. At the same time, the stock
of securitized loans fell by $900billion. Issuance of securitized assets remains at
less than two-thirds of its pre-crisis level. Indeed, if we exclude mortgage-backed
securities issued by US government entities (e.g., Fannie Mae and Freddie Mac),
securitization volumes are only 17percent of their pre-crisis level. Whether or not
securitization outside of government entities will emerge as a significant source of
credit in theyears to come remains to be seen.
On the other side of bank balance sheets, we see a shift in funding sources with
more deposits and less debt. Worldwide bank deposits increased by $2.9trillion
in 2010.
6
China accounted for $1.1trillion of the increase in bank deposits (of which
roughly 60percent was from households and 40percent from corporations), with
total Chinese deposits reaching $8.3trillion. This reflected the high saving rate of
households and limited range of saving vehicles available to them, as well as the large
retained earnings of corporations.
7
Bank deposits in the UnitedStates increased by
$385billion, while deposits in Western Europe rose by $250billion. In contrast, the
stock of bonds issued by financial institutions shrank as they sought more stable
sources of funding. Financial institution bonds outstanding declined by $1.4trillion,
the first significant decrease ever recorded in our data series that begins in 1990.
5 In Fall 2011, we will explore the topic of debt and deleveraging in more detail in a full 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 currency in circulation, money market
instruments, and nonbank nancial institutions deposits with other entities in the banking
system.
7 For more explanation of Chinese saving, see Farewell to cheap capital? The implications of
long-term shifts in global saving and investment, McKinsey Global Institute, December 2010
(www.mckinsey.com/mgi); Marcos Chamon and Eswar Prasad, Why are saving rates of urban
households in China rising? NBER working paper, 14546, December 2008.
4
Emerging markets account for a growing share of global financial
stock
The majority of absolute growth in the global financial stock occurred in mature
markets in 2010, but emerging markets are catching up. Developed countries
financial stock grew by $6.6trillion, while that of emerging markets increased by
$4.4trillion. Among emerging markets, China alone accounted for roughly half of that
growth with $2.1trillion, reflecting large increases in bank lending and the market
capitalization of the Chinese equity market.
Emerging markets financial stock is growing much faster than that of developed
countries, increasing by 13.5percent in 2010 compared with 3.9percent in mature
countries. This trend has been the norm for some time. From 2000 to 2009, the stock
of equity and debt in emerging markets grew by an average of 18.3percent a year
compared with only 5.0percent in developed countries. So while emerging markets
collectively account for only 18percent of the worlds total financial stock at the end
of 2010, they are in the process of catching up and are becoming important players in
the global financial landscape.
Looking ahead, the long-term fundamental drivers of financial market growth remain
strong in developing economies. Many of these economies have high national
saving rates that create large sources of capital for investment, and they have vast
investment needs for infrastructure, housing, commercial real estate, and factories
and machinery.
8
Moreover, their financial markets today are much smaller relative to
GDP than those in mature markets. The total value of all emerging market financial
stock is equal to 197percent of GDP161percent if we exclude Chinawhich is
much lower than the 427percent of GDP of mature economies (ExhibitE2).
8 For projections on growth in investment demand in emerging markets, see Farewell to cheap
capital? The implications of long-term shifts in global saving and investment, McKinsey Global
Institute, December 2010 (www.mckinsey.com/mgi).
Exhibit E2
116
31
115
47
75
220
72
49
28
44
38
119
72
69
152
97
93
96
62
57 48
1 2
4
2
5
2
3
20
31
20
24
34
142
62
6
Latin
America
148
27
3
Other
Asia
168
54
10
7
Middle
East and
Africa
190
66
6
15
India
209
60
1
7
China
280
127
10
16
Other
developed
388
91
29
Western
Europe
400
110
15
19
Japan
outstanding
106
10
18
United
States
462
44
457
Securitized loans
outstanding
bonds outstanding
bonds outstanding
outstanding
Stock market
capitalization
CEE and
CIS
2
77
Financial depth is lower in emerging markets, primarily because of
the 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
More specifically, we see ample potential for growth by looking at individual asset
classes. Emerging market equities, for example, have significant headroom to grow
as more state-owned enterprises are privatized and as existing companies expand.
Markets for corporate bonds and other private debt securities remain nascent. The
value of corporate bonds and securitized assets is equal to just 7percent of GDP
in emerging markets compared to 34percent in Europe and 108percent in the
UnitedStates. With the appropriate regulatory changes, corporate bond markets
in emerging markets could provide an alternative to bank financing, and some of
the plain vanilla forms of securitization (such as those backed by low-risk prime
mortgages) could develop.
Bank deposits also constitute an asset class with enormous growth potential in the
developing world, where large swaths of the population have no bank accounts.
There are an estimated 2.5billion adults with discretionary income who are not part of
the formal financial system.
9
Bank deposits will swell as household incomes rise and
individuals open savings accounts.
In contrast, prospects for rapid growth in private debt securities and equity in mature
economies are relatively dim. The circumstances that fueled the rapid increases of
pastdecades have changed, and this makes it likely that total financial assets will
grow more in line with GDP in comingyears. For instance, debt issued by financial
institutions accounted for 42percent of the $115trillion increase in private-sector
debt since 1990, with growth in asset-backed securities accounting for an additional
16percent. However, securitization is now negligible outside government programs,
and financial institutions are reducing their use of debt financing as they increase
their capital levels and raise more deposits. In equities, net new issuance of equities
has been low and was actually negative from 2005 to 2007. Corporate profits are
at historic highs relative to GDP. This means that further equity market growth
would have to come either from higher equity valuations or from further increases in
corporate earnings as a share of GDP.
GLOBAL CAPITAL FLOWS ARE RECOVERING, REACHING
$4.4 TRILLION IN 2010
One of the most striking consequences of the 2008 financial crisis was a steep drop
in cross-border capital flows, including foreign direct investment (FDI), purchases and
sales of foreign equities and debt securities, and cross-border lending and deposits.
These capital flows fell by about 85percent during the crisis from $10.9trillion in
2007 to just $1.9trillion in 2008 and to $1.6trillion in 2009. This reflects the plunge
in demand for foreign investment by banks, companies, and other investors during
the global financial turmoil. Cross-border capital flows picked up in 2010 as the
economic recovery took hold, reaching $4.4trillion (ExhibitE3). Nonetheless, they
remain at their lowest level relative to GDP since 1998.
This decline in cross-border capital flows during a recession fits the historical pattern.
Cross-border investing had experienced three other boom-and-bust cycles since
1990, with sharp declines following the economic and financial turmoil in 199091,
199798, and 200002. The question today is whether cross-border capital flows
after the most recent recession will eventually exceed their previous heights, as
9 See Alberto Chaia, Tony Goland, and Robert Schiff, Counting the worlds unbanked,
McKinsey Quarterly, March 2010; Alberto Chaia et al, Half the world is unbanked, The Financial
Access Initiative, October 2009.
6
they have after past recessions, or whether new regulations and shifts in investor
sentiment will dampen such flows.
Contraction of interbank lending led the decline in capital flows
Nearly all types of capital flows have declined relative to their 2007 peak, but the
largest decrease has been in cross-border bank lending. During 2008 and 2009,
these flows 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
flows are still $3.8trillion below their peak, amounting to just $1.3trillion in 2010.
10

Interbank lending in Western Europe accounted for 61percent, or $2.3trillion, of
the total decline in cross-border lending. This reflects the uncertainty created by the
sovereign debt crisis in Europe and the continuing fragility of the financial system.
Equity cross-border flows have been less volatile than debt flows. Foreign direct
investment has historically been the least volatile type of capital flow as it reflects
long-term corporate investment and purchases of less liquid assets, such as factories
and office buildings. Recentyears have proved no exception. FDI flows totaled
$900billion in 2010, roughly 45percent of their 2007 peak, while purchases of foreign
equities by investors totaled $670billion, 30percent below their 2007 level.
Cross-border capital flows to emerging markets have been less volatile
than those to developed countries
Contrary to the common perception that capital flows to emerging markets are
highly volatile, we observe that flows between developed countries are more volatile.
When adjusting for average size, capital flows to developed countries are 20percent
more volatile than flows to emerging markets. Most of this variability comes from
cross-border lending, which is nearly four times as volatile as FDI. In the 2008 crisis,
capital flows between mature countries turned negative in the fourth quarter of 2008
10 Similarly, growth of interbank lending, particularly in Western Europe, explains part of the
growth in global capital ows 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
2010 2000
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 of
their 2007 level
% of global
GDP
4 5 6 13 4 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 inflows
comprised of inward FDI and portfolio (e.g., equity and debt) and lending inflows.
Total cross-border capital inflows, 19802010
1,2
$ trillion, constant 2010 exchange rates
and the first quarter of 2009, indicating that foreign investors sold investments and
repatriated their money back to their home country. During the same period, quarterly
capital flows to emerging markets fell by $150billion but remained positive, indicating
that foreign investors did not withdraw money back to their home countries and
continued to make new investments (ExhibitE4).
The lower volatility of capital flows to emerging markets partly reflects the fact that
more than 60percent of such flows over the past decadeand in particular FDI
have been in equity investments. As we have explained, this is the most stable type of
capital flow. In contrast, just one-third of foreign investment flows into mature markets
are in equity investments.
In 2010, foreign capital inflows to Latin America surged, reaching $254billionmore
than flows to China, India, and Russia combined. This total was 60percent higher
than in 2009 and four times as high as their annual average from 2000 to 2007.
Foreign investors purchased $76billion of Latin American government and corporate
bonds in 2010, while $59billion constituted cross-border lending. In contrast to flows
to other emerging markets, only 31percent of total flows to Latin America were in the
form of FDI. Across countries, Brazil received a majority of foreign capital inflows,
accounting for $157billion of the total. This surge in foreign investor interest has
prompted concerns about unwanted exchange-rate appreciation in Brazil.
Emerging markets are also becoming more important foreign investors in world
markets as their capital outflows grow rapidly. Foreign investments from emerging
market investors reached $922billion in 2010, or 20percent of the global total. This is
up sharply from just $280billion, or 6percent of the global total, in 2000. A large part
of this investment outflow61percentreflected purchases of foreign securities by
central banks. However, investments from other investors, including corporations,
individuals, and sovereign wealth funds, are also rising. FDI from emerging
markets reached $159billion, lower than its 2008 peak but still more than double
its size fiveyears earlier. Although Chinas outward FDI has attracted significant
Exhibit E4
Capital flows to emerging markets are smaller but more stable than
flows to developed countries
SOURCE: International Monetary Fund; McKinsey Global Institute analysis
Cross-border capital inflows to developed countries
and emerging markets, Q1 2000Q4 2010
35
8
13
10
21
53
Interbank
lending
Lending to
nonbank
sectors
Debt
securities
Equity
securities
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
8
attention, it remains less than that from the former countries of the Soviet Union in
the Commonwealth of Independent States ($44billion for China compared with
$60billion from CIS). Emerging market investors will become increasingly important
players in foreign markets as their economies grow.
THE STOCK OF CROSS-BORDER INVESTMENTS HIT $96 TRILLION
IN 2010, BUT GLOBAL IMBALANCES ARE GROWING AGAIN
Reflecting the growth of global capital flows, the worlds stocks of foreign investment
assets and liabilities also increased in 2010. Global foreign investment assets
reached $96trillion, nearly ten times the amount in 1990, as companies and
investors sought to diversify their portfolios globally. Not surprisingly, investors from
developed countries account for the largest share of these assets (87percent).
The UnitedStates is the worlds largest foreign investor, with $15.3trillion in foreign
assets, followed by the United Kingdom with $10.9trillion and Germany with
$7.3trillion. Foreign investment assets owned by emerging markets have grown at
twice the pace of those of mature countries, as their outward foreign investment flows
increase.
Looking at the net position of each countrys foreign assets and liabilities reveals
a different picture. We see that the UnitedStates is the worlds largest net foreign
debtor, with foreign liabilities exceeding assets by $3.1trillion, or 21percent of GDP
(ExhibitE5). This reflects the persistent US current account deficit, which must be
funded with net foreign borrowing. Spain is the worlds second-largest foreign debtor,
with a net foreign debt of $1.3trillion, or 91percent of GDP. Australia has run a large
current account deficit for manyyears and is the third-largest foreign debtor with a
net debt of $752billion (63percent of GDP).
On the creditor side, Japan remains the worlds largest net foreign creditor, with
net assets of just over $3trillion. This may seem surprising given that Japan has
the worlds largest government debt at more than 200percent of GDP. However,
Japanese savers, banks, and corporationsnot foreign investorshold more than
Exhibit E5
In 2010, the United States was the worlds largest foreign debtor and
Japan the globes largest foreign creditor
1 Calculated as foreign investment assets less foreign investment liabilities.
Largest net foreign debtors
1
Largest net foreign creditors
1
-308
-325
-331
-355
-446
-453
-703
-752
-1,263
-3,072
360
492
585
626
691
698
882
1,207
2,193
3,010
15,284 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
1,376
1,122
1,699
6,116
202
2,348
2,032
389
198
884
762
Net position, 2010
1
$ billion
Assets Liabilities
United
States
Spain
Australia
Brazil
Italy
United
Kingdom
Mexico
Greece
France
Poland
Japan
China
Germany
Saudi Arabia
Switzerland
Hong Kong
Taiwan
United Arab
Emirates
Singapore
Norway
90percent of this debt. At the same time, Japan has significant foreign investment
assets, including roughly $1trillion of central bank reserve assets, $830billion in
foreign direct investment abroad, $3.3trillion of foreign equity and debt securities,
and $1.6trillion in foreign lending and deposits.
China is the worlds second-largest net foreign creditor with net foreign assets of
$2.2trillion, and Germany is third ($1.2trillion). These are also the countries that have
maintained the largest current account surpluses.
Countries annual current account surpluses and deficits fell sharply after the
2008 financial crisis and recession, roughly halving in size. This reflected the lack
of 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 deficits. Without higher saving rates in deficit
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 following pages, we provide a more detailed look at the state of the worlds
financial markets at the end of 2010. The data we present here come from MGIs
proprietary databases on global financial markets. The exhibits that follow cover
changes in the financial stock, cross-border capital flows, and foreign investment
assets and liabilities of more than 75 countries around the world.
10
Exhibits
GLOBAL FINANCIAL STOCK
Exhibit1. Global financial stock, 19902010
Exhibit2. Global equity outstanding, 19902010
Exhibit3. Net equity issuances, 200510
Exhibit4. IPO deal volume by exchange location, 200010
Exhibit5. Global debt outstanding by type, 200010
Exhibit6. Nonsecuritized loans outstanding by region, 200010
Exhibit7. Securitization issuance by region, 200010
Exhibit8. Nonfinancial corporate bond issuance, 200010
Exhibit9. Global public debt outstanding, 19902010
Exhibit10. Public debt outstanding by region, 200010
Exhibit11. Deposits by region, 200010
Exhibit12. Emerging markets share of global financial stock, 2010
Exhibit13. Financial depth by region, 2010
Exhibit14. Financial depth vs. per capita GDP, 2010
CROSS-BORDER CAPITAL FLOWS
Exhibit15. Global cross-border capital flows, 19802010
Exhibit16. Change in cross-border capital flows by asset class, 200710
Exhibit17. Capital flows to developed and emerging markets, 200010
Exhibit18. Capital flows to and from emerging markets, 2010
FOREIGN INVESTMENT ASSETS AND LIABILITIES
Exhibit19. Stock of global foreign investment assets, 19902010
Exhibit20a. Bilateral cross-border investment assets between regions, 1999
Exhibit20b. Bilateral cross-border investment assets between regions, 2009
Exhibit21. International investment positions by country, 2010
12
The worlds financial stock rose by $11trillion in 2010
The worlds stock of equity and debt rose by $11trillion in 2010 to reach $212trillion,
surpassing the previous peak of $202trillion in 2007. More than half of the increase
came from growth in equities, which rose by 12percent or $6trillion. Credit markets
also grew in 2010, albeit more unevenly. Government debt increased by $4.4trillion,
with growth concentrated in the advanced economies that were still coping with the
effects of the 2008 financial crisis. Bank lending also rose with more than half of the
increase coming from emerging markets. In contrast, the outstanding amounts of
bonds issued by financial institutions and of securitized assets both shrank as the
financial sector moved to more stable sources of funding and securitization remained
at low levels.
Note: For this 2010 update, we use a new definition of the global financial stock,
replacing bank deposits and currency with loans held on balance sheets.
11
Using
loans gives a consistent perspective of the funds raised by a countrys resident
households, 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
29
35
41
41
44
42
13
16
25
28
30
32
37
41
11
17
36
45
55
65
34
48
54
3
2
10
3
3
8
9
212
49
15
09
201
47
16
9
08
175
45
16
8
07
202
43
15
8
06
179
40
outstanding
14
7
05
155
38
11
6
2000
114
Securitized loans
outstanding
6
5
95
72
24
1990
54
31
bonds outstanding
bonds outstanding
outstanding
Stock market
capitalization
2010
22
2 Calculated as global debt and equity outstanding divided by global GDP.
321 334 360 376 309 356 356 263 261
Global stock of debt and equity outstanding
1
Financial
depth
2
(%)
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 annual
growth rate
%
14
Global stock market capitalization grew to $54trillion
The total value of equity securities outstandingthe worlds stock market
capitalizationis the single largest component of the global financial stock. At
$54trillion at the end of 2010, equities outstanding account for just over 25percent of
the worlds outstanding financial stock. Although the 2010 stock market capitalization
was $11trillion below its peak in 2007, it accounted for more than half of the growth in
global financial assets in 2010 and posted the fastest growth rate (nearly 12percent).
The capitalization of the US equity market rose by $2.3trillion and accounted for
40percent of the global increase. China saw the second-largest increase in the
value of its equity securities of some $526billion.
12
Growth in equity markets in many
countries reflected the continued recovery of depressed valuations following large
stock market declines in 2008. However, we also see growth in the book value of
equity that reflects rising corporate profits. Growth in the book value of equity has
been much more stable than the market value, with an average increase of about
8percent per annum since 1990.
12 Chinas stock market capitalization includes the full value of listed companies, although a
substantial portion of shares are 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 value
of equity
Valuation
effect
2010
30
24
07 95
8
9
1990
6
5
Swings in valuation levels are responsible for most of the fluctuations in
global equity outstanding
SOURCE: Standard and Poors; Datastream; Bloomberg; McKinsey Corporate Performance Analysis Tool (CPAT); McKinsey
Global Institute analysis
7.9
8.3
8.1
1 Calculated based on yearly country-specific market-to-book multiple.
Total stock
market
capitalization
21.2
4.9
11.7
Market-
to-book
multiple
1.8 2.2 2.9 2.3 2.4 1.8
Total global equity outstanding
1
199009 200910
Compound annual
growth rate
%
11
17
36
45
65
54
Global net equity issuance totaled $387billion in 2010,
the majority from emerging markets
Global net equity issuance totaled $387billion in 2010, down from its peak of
$688billion in 2009. However, global aggregates hide significant differences in
equity issuance between developed countries and emerging markets. In developed
countries, net equity issuance was negative from 2005 through 2007, as the value
of share buybacks exceeded the value of new equity issues. This de-equitization
was driven by nonfinancial corporations. Net equity issuance in developed countries
surged in 2008 and 2009 as firmspredominantly banksreduced share buybacks
and instead raised capital to weather the storm of the financial crisis. Share buybacks
declined from their 2007 peak of $1.1trillion to just $440billion in 2009, increasing
slightly to just over $500billion in 2010. In contrast to developed countries, 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 of state-owned firms. Net issuance among emerging market companies
totaled $259billion in 2010, with over $100billion in both first-time offerings and
secondary rounds of equity issuance by successful and growing emerging market
firms.
Exhibit 3
128
538
215
-308
-197
-99
Net equity issuances
1
$ billion
Both developed countries and emerging markets were net equity issuers
in 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
Secondary
offerings
Developed countries Emerging markets
Share
buybacks
259
150
89
243
144
99
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
2009 2005 2006 2007 2008 2010
63
12
47
2009 2005 2006 2007 2008 2010
16
Initial public offerings on emerging market exchanges
surpassed those on developed country exchanges
Growth in the issuance of emerging market equities has coincided with the rise of
stock exchanges in these economies, and they are becoming increasingly important
venues for raising capital around the world. Initial public offerings on emerging market
exchanges totaled just $11billion in 2000. By 2007 that number had increased
to $100billion; by 2010 the total had reached $165billion, exceeding initial public
offerings on developed countries stock exchanges. China has been a significant
contributor to this growth, with its exchangesincluding Hong Kongattracting
$125billion, or 44percent, of total deal volume in 2010. Hong Kong, Shenzhen,
and Shanghai have become rivals to London and New York for new listings, not just
for emerging market firms but also for corporations headquartered in developed
countries. For instance, in May Glencore listed its initial public offering, one of the
largest ever for a European firm, in both London and Hong Kong. Prada listed its
shares on the Hong Kong exchange in June. Meanwhile, Coca-Cola has begun
exploring a listing in Shanghai. Firms around the world are listing in Asia to take
advantage of ample capital and hungry investors.
Exhibit 4
Number
of IPOs
More than half of global IPO volume occurred on
emerging market exchanges in 2009 and 2010
Deal volume in different stock exchange locations
$ billion
1,133 595 1,439 952 824 1,432 1,622 1,802 713 1,985 1,629
SOURCE: Dealogic; McKinsey Global Institute analysis
134
32
26
72
82
106
100
21
68
25
41
38
54
125
16
21
62
22
18
40
23
13
2010
New York
London
50
14
41
12
23
5
3
4
12
6
51
12
6
35
11
137
26
25
174
32
56
256
47
52
299
8
29
11
59
03
83
19
2
115
35
13
280
4
88
Other
emerging
4
2000
China
Other
developed
8
3
02 04 01 06 07 08 09
1
05
208
3
Global debt to GDP increased from 218percent in 2000
to 266percent in 2010
Global debt outstanding has more than doubled over the past tenyears, increasing
from $78trillion in 2000 to $158trillion in 2010. Debt also grew faster than GDP over
this period, with the ratio of global debt to world GDP increasing from 218percent
in 2000 to 266percent in 2010. Most of this growth$48trillionhas been in the
debt of governments and financial institutions. Although government debt has been
the fastest-growing category, it is notable that bonds issued by financial institutions
to fund their balance sheets have actually been a larger class of debt over the past
tenyears. Indeed, the bonds issued by financial institutions around the world has
increased by $23trillion over the past decade. In 2010, this shrank by $1.4trillion
as banks moved to more stable funding sources. Nonsecuritized lending is still the
largest component of all debt and continued to grow in 2010.
Exhibit 5
Growth in public debt continued in 2010, but nonsecuritized loans remain
the largest class of debt
0
5
10
15
20
25
30
35
40
45
50
04 02 2000
bonds outstanding
Securitized loans
outstanding
outstanding
bonds outstanding
Nonsecuritized
loans outstanding
2010 08 06
Global debt
1
218
77.6
Outstanding debt by asset class, 200010
% 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 Institute
analysis
1 Sum of financial institution bonds outstanding, public debt securities outstanding, nonfinancial corporate bonds outstanding,
and both securitized and nonsecuritized loans outstanding.
200009 200910
Compound annual
growth rate
%
$ trillion
18
On-balance-sheet loans increased by $2.6trillion in
2010, but growth differed between regions
Loans held by banks, credit agencies, and other financial institutions account for the
largest share of global debt outstandingat 31percent. On-balance-sheet loans
grew from $31trillion in 2000 to $49trillion in 2010, an increase of 4.8percent per
annum. However, this global total hides key differences between regions. Since 2007,
outstanding loan volumes in both Western Europe and the UnitedStates have been
broadly flat with a decline in 2009 followed by a modest increase in 2010. In Japan,
the stock of loans outstanding has been declining since 2000, reflecting deleveraging
by the corporate sector. Lending in emerging markets has grown at 16percent
annually since 2000and by 17.5percent a year in China. In 2010, loan balances
increased worldwide by $2.6trillion. Emerging markets accounted for three-quarters
of this growth. Chinas net lending grew by $1.2trillion, partly reflecting government
stimulus efforts, while lending in other emerging markets rose by $800billion.
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 outstanding
1
per region
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 financial
institutions 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
3.4
3.5
3.7
2005
37.4
15.4
6.5
6.1
3.3
3.0
3.1
2000
30.8
12.0
7.9
5.0
2.6
1.5
1.7
200009 200910
Compound annual
growth rate
%
Issuance of securitized assets has declined sharply in
the wake of the 2008 financial crisis
Securitized lending was the fastest-growing segment of global debt from 2000 to
2008 with outstanding volumes increasing from $6trillion to $16trillionaverage
growth of 13percent per year. Roughly 80percent of securitization issuance over this
period occurred in the UnitedStates. The issuance of mortgage-backed securities
by government-sponsored enterprises more than doubled between 2000 and 2007
and hit a peak in 2002 that was nearly four times as large as in 2000. The creation of
asset-backed securities by US banks and other non-government issuers tripled over
this period, as did securitization in the rest of the world albeit from much lower levels.
Since 2008, securitization by the US private sector and in other parts of the world has
fallen dramatically. Only US government-supported mortgage issuers have sustained
activity in the market over the past fewyearsand new issuance in 2009 surged and
roughly matched the peak level of 2002. Future prospects in the securitization market
are unclear. Regulators are seeking to curtail the shadow banking system, while
financial institutions argue that securitization facilitates lending to those in need of
credit.
Exhibit 7
Global securitization has dried up since 2007, apart from issues by
US government-sponsored enterprises
383
671
1,183
1,651
1,663
1,276
341
482 671
542
Rest of world
2010
1,998
1,707
121
170
09
2,284
2,030
163
92
08
1,635
1,317
185
133
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 GSEs
2
Other United States
Global annual securitization
1
issuance
$ billion, nominal exchange rates
Securitized loans
outstanding
$ 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 debt
obligations (CDOs) issued by U.S. GSEs.
2 Government-sponsored enterprises, i.e., Fannie Mae, Freddie Mac, and Ginnie Mae.
20
Nonfinancial corporate bond issues totaled $1.3trillion
in 2010, 50percent higher than the pre-crisis level
Issuance of corporate bonds by nonfinancial issuers nearly doubled in 2009
compared with 2008 as bank lending standards tightened and interest rates
stayed at historic lows. Issuance totaled $1.5trillion in 2009, with $548billion in
Western Europe, a historic high. Corporate bond issuance remained high in 2010
at $1.3trillion, more than 50percent 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 financing. Although the majority of growth occurred in
developed countries, corporate bond issuance has also grown rapidly in recentyears
in emerging economies. Chinas corporate bond issuance peaked at $151billion
in 2009, up from just $17billion in 2007. Corporate bond issues are also increasing
in Brazil, Russia, and other emerging markets; their issuance reached $128billion
in 2010. In total, emerging markets accounted for 23percent of global corporate
issuance in 2010, up from just 15percent threeyears earlier. There is still significant
room for further growth in corporate bond markets in virtually all countries outside the
UnitedStates. The UnitedStates is the only country where corporations rely on debt
capital markets to provide a sizable share of their external financing. Bonds account
for 53percent of corporate debt financing in the UnitedStates compared with
24percent in Western Europe and only 16percent in emerging economies. Given the
higher cost of bank financing, especially in light of new capital requirements, it would
be desirable to see a more rapid expansion of debt capital markets in Europe and in
emerging markets. This is an important issue for 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
97
91
95
78
10
4
1
73
68
29
Other
emerging
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
4
54
03
639
198
4
44
02
486
122
01
720
190
24
2000
451
156
Western
Europe
United
States
Other
developed
China
15
SOURCE: Dealogic; McKinsey Global Institute analysis
Government debt has increased by $9.4trillion since
2008
Government debt has increased significantly. There was some growth between 2000
and 2008, but the amount of government debt has jumped in 2009 and 2010. Public
debt outstanding (measured as marketable government debt securities) stood at
$41.1trillion at the end of 2010, an increase of nearly $25trillion since 2000.
13
This was
the equivalent of 69percent of global GDP, 23percentage points higher than in 2000.
In just the past twoyears, public debt has grown by $9.4trillionor 13percentage
points of GDP. In 2010, 80percent of the growth in total debt outstanding came from
government debt. While stimulus packages and lost revenue due to anemic growth
have widened budget deficits since the crisis, rising global public debt also reflects
long-term trends in many advanced economies. Pension and health care costs are
increasing as populations age, and unfunded pension and health care liabilities
are not reflected in current government debt figures. Without fiscal consolidation,
government debt will continue to increase in theyears to come.
13 There is no single methodology for measuring government debt. Our data do not include
intragovernmental holdings, which some other organizations, such as the International
Monetary Fund, include.
Exhibit 9
Global public debt has increased by $24.6 trillion over
the last decade, reaching 69 percent of GDP in 2010
70
65
60
55
50
45
0
+3
+23
2000 05 08 95 2010 1990
40
SOURCE: Bank for International Settlements; McKinsey Global Institute analysis
Public
debt total
$ trillion
8.9 16.5 25.4 12.8 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 debt
1
as % of GDP
%, end of period, constant 2010 exchange rates
Growth
(percentage points)
22
Government debt in many developed countries has
risen to unprecedented levels
In the 1970s, 1980s, and 1990s, there were numerous sovereign debt crises in
emerging markets that proved very costly in terms of lost output, lower incomes,
andyears of 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 of government debt to national GDP remains rather small.
In contrast, the UnitedStates, Japan, and many Western European governments
have seen their debt rise significantly. Japans government debt began rising
after its financial crisis in 1990 and has now reached 220percent of GDP. In both
the UnitedStates and Western Europe in 2010, the ratio of public debt grew by
9percentage points to stand at more than 70percent of GDP by the end of the year.
With budgets under pressure from both short-term crisis-related measures and long-
term pressures on growth and calls on the public purse (including aging populations
in many countries), developed countries may need to undergoyears of spending cuts
and higher taxes in order to get their fiscal 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 Rogoff, This time is different: Eight centuries of nancial folly, Princeton University
Press, 2009.
Exhibit 10
Governments in many developed economies have
steadily 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 CIS
2
United States
China
Latin America
Other Asia
Other developed
Middle East
and 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 outstanding
1
per region
1 Defined as general government marketable debt securities; excludes government debt held by government agencies
(e.g., US Social Security Trust Fund).
Developed
Emerging
2000 2009 2010
% of regional GDP, end of period
$ trillion
(constant 2010
exchange rates)
Compound
annual growth
rate, 200910 (%)
Global bank deposits increased by 5.6percent in 2010
Global bank deposits have grown slightly faster than GDP over the past tenyears
and have increased from 80percent of GDP in 2000 to 90percent of GDP at the end
of 2010. Among developed countries, deposits grew fastest in the UnitedStates,
increasing from $5trillion in 2000 to $11trillion in 2010. This reflected the growing
share of household financial assets held in cash rather than bonds or equity
sharesa reversal of trend from previousyearsas well as rising corporate
cash balances. Western European and Japanese deposits grew more slowly as
households there have traditionally held more of their wealth in the form of deposits
rather than other types of financial assets. Deposits in China and other emerging
markets continued their strong growth into 2010, rising 13.6percent in aggregate
to reach $14.5trillion. Deposit growth in all these countries is the result not only
ofyears of strong GDP growth and economic development but also the fact that most
emerging market households have few alternatives for their investments. Financial
systems, not least banking, are underdeveloped in many of these countries. There
are an estimated 2.5billion adults in emerging markets with discretionary income who
are not part of the formal financial 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 Schiff, Counting the worlds unbanked,
McKinsey Quarterly, March 2010; Alberto Chaia et al, Half 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 end
of 2010
Global bank deposits
1
200009 200910
Compound annual
growth rate
%
1 Excludes cash in circulation, money market instruments, and deposits made by nonbank financial institutions with other parts
of 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
Western
Europe
Japan
United
States
Other
developed
China
Other
emerging
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
3.9
3.7
3.1
2000
28.6
7.3
10.0
5.0
2.6
1.8
1.7
83 83 83 84 80 Deposits
% of GDP
91 90
24
Emerging markets account for 18percent of the global
financial stock, but their share has tripled since 2000
Today, developed countries account for the vast majority of the capital raised
through equity and debt worldwide. However, emerging markets are catching up. In
2010, US households, corporations, and governments accounted for 32percent of
outstanding debt and equity worldwide at $67.5trillion. The economies of Western
Europe combined accounted for $63.6trillion, or about 30percent of the global
total. Japan and other developed economies accounted for roughly 20percent of
the worlds debt and equity outstanding. Turning to emerging markets, households,
corporations, and governments had outstanding debt and equity of just $37.1trillion,
or 18percent of the global total, at the end of 2010. This is far below their share of
global GDP of 32percent. However, emerging markets share of the global financial
stock has tripled since 2000 as their financial systems improve and as the largest
corporations and governments tap foreign investors.
16
China accounts for 43percent
of the emerging market share, but almost all emerging market regions have seen their
financial stock grow faster than their developed counterparts. In the case of China,
its financial stock has grown four times as fast as that of Western Europe and the
UnitedStates.
16 For more on investment in infrastructure, real estate, and other physical assets in emerging
markets, see Farewell to cheap capital? The implications of long-term shifts in global saving
and investment, McKinsey Global Institute, December 2010 (www.mckinsey.com/mgi).
Exhibit 12
Stock of debt and equity outstanding, 2010
1
% 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 East
and Africa
15.8
CEE and CIS
2
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 CIS
2
2.5
Latin America
2.7
China
Other developed
8.7
Japan
11.7
Western Europe
30.1
United States
31.9
Developed countries
Emerging markets
SOURCE: Bank for International Settlements; Dealogic; SIFMA; S&P; McKinsey Global Banking Pools; McKinsey Global
Institute analysis
Emerging markets account for the smallest share
but also the fastest growth in the global financial stock
Stock of debt and equity outstanding, 2010
1
End of period
100% = $212 trillion
Compound annual growth rate, 200010
%
The composition of funding sources varies across
countries
The depth of a countrys financial marketsmeasured as the value of outstanding
bonds, loans, and equity relative to the countrys GDPreveals the extent to which
corporations, households, and governments can fund their activities through
financial intermediaries and markets. Today, developed countries have much
deeper financial markets than those found in emerging markets. Financial depth in
the UnitedStates, Japan, Western Europe, and other developed countries is near
or above 400percent of GDP, compared with 280percent in China and around
200percent or less in other emerging markets. Comparing the components of
financial depth across countries reveals that even those with the same level of
financial depth can finance themselves in very different ways. For example, nearly half
of Japans financial depth is due to the size of its huge government bond market
taking that market out of the equation would leave Japan with a lower financial depth
than that of China. Corporate bond and securitization markets are largest in the
UnitedStates, while Western Europe relies much more heavily on traditional bank
loans for financing. Emerging markets fund themselves mainly through bank lending
and equity markets. Bond markets account for a much smaller share of their financial
markets overall, except for Latin America.
Exhibit 13
Financial depth, year end 2010
1
Percent; % of regional GDP
The structure of capital and banking markets varies widely
between countries
1 Calculated as total regional debt and equity outstanding divided by regional GDP.
25
7
29
12
6
14
16
48
18
13
10
21
8
20
26
17
26
16 17
39
35
44
51
37
39
34
1
2
6
5 5
7
4
outstanding
Securitized loans
outstanding
bonds outstanding
bonds outstanding
outstanding
Stock market
capitalization
CEE and
CIS
2
142
44
1
Latin
America
148
18
2
2
Other
Asia
168
32
1
4
Middle
East and
Africa
190
35
3
3
India
209
29
0
3
China
280
45
1
4
Other
developed
388
23
7
400
28
4
Japan
457
23
Western
Europe
4
United
States
462
10
17
100% =
2
26
Emerging markets have ample room to deepen their
financial systems
Despite rapid growth in the financial stock of emerging markets over the past decade,
there is still ample room for further growth. One reason is that the development
of financial markets is associated with higher incomes and a greater degree of
economic development. Most emerging markets financial depth is between 50
and 250percent of GDP compared with 300 to 600percent of GDP in developed
countries. As emerging economies evolve, it is likely that their financial markets
will develop, too. Well-functioning capital and banking markets make it easier for
households, corporations, and governments to raise funds for investment. Greater
economic output means more excess revenue and income can be invested in capital
markets and deposited in banks in order to finance even more productive activity.
However, the degree to which financial deepening occurs in many of these countries
will depend crucially on whether they have the right regulatory and institutional
framework to channel funds to their most productive use. Countries can have very
different financial depth even at the same level of income. For instance, Norway
has higher per capita GDP than the Netherlands, but its financial markets are half
as deep. This reflects the fact 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 Africa have a much higher financial depth than do other
countries at similar income levels and are roughly on a par with much richer countries
including Belgium and Canada.
Exhibit 14
Financial markets in developing countries still have
significant 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
Poland
Philippines
China
Canada
Croatia
Finland
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
Indonesia
Peru
Norway
Nigeria
New Zealand Morocco
Argentina
Lithuania
8,500 3,000 0
Financial depth
1
% of GDP
Per capita GDP at purchasing power parity
$ per person, log scale
55,000 23,000
2010, end of period
SOURCE: Bank for International Settlements; Dealogic; SIFMA; Standard & Poors; McKinsey Global Banking Pools; McKinsey
Global Institute analysis
1 Calculated as a countrys debt and equity outstanding divided by countrys GDP.
Emerging
Developed
D
e
e
p
e
r

f
i
n
a
n
c
i
a
l

m
a
r
k
e
t
s
Cross-border capital flows have started to recover but
still stand at only 40percent of their record level in 2007
One of the most striking features of global capital markets over the past two decades
has been the rise and fall of cross-border capital flowsincluding foreign direct
investment (FDI), purchases of foreign equities and debt securities, and cross-
border lending and deposits. From 1994 to 2007, cross-border capital flows grew
on average by 23percent each year. Over this period, these flows increased from
4percent of global GDP to 20percent. Increased stability in emerging markets has
attracted capital from developed country investors, while the creation of Europes
Economic and Monetary Union has facilitated the flow of capital within Western
Europe. However, cross-border capital flows collapsed in 2008 as investors became
more cautious and banks became more reluctant to lend internationally. Total capital
flows declined from $10.9trillion in 2007 to only $1.9trillion in 2008a decrease of
83percent in a single year. Global capital flows declined even further in 2009, totaling
only $1.6trillion over the course of the year. There was a rebound in 2010 when capital
flows totaled $4.4trillion. However, this was only 40percent of record capital flows in
2007, indicating that the recovery of the global financial system is far from complete.
Exhibit 15
12
10
8
6
4
2
0
+2.8
4.4
1.6
10.9
2005
7.1
-9.2
2010 2000
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 of
their 2007 level
% of global
GDP
4 5 6 13 4 15 8
1 Inflows defined as net purchases of domestic assets by nonresidents (including nonresident banks); total capital inflows
comprised of inward FDI and portfolio (e.g., equity and debt) and lending inflows.
Total cross-border capital inflows, 19802010
1,2
28
Cross-border lending accounted for 60percent of the
decline in total capital flows since 2007
The $6.5trillion decline in cross-border capital flows from their 2007 peak has been
the result of a reduction in most categories. The collapse of the international lending
market, specifically the interbank lending in Western Europe, explains the majority
of the decline in annual capital flows 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 flows in 2010 reflects the recovery of this international interbank
market, but total lending flows are still only 25percent of their peak 2007 level.
Investment in other categories of developed country capital flows also remain below
their 2007 level. Foreign purchases of their debt securities in 2010 were $1.2trillion
less than their peak in 2007, while firms FDI was $1.6trillion lower than it was in 2007.
Across countries, we see that the majority of the decline occurred in capital flows
between mature economiesan $800billion reduction in capital flows to emerging
markets accounts for only 12percent of the overall decline. Continued instability and
low returns in developed countries combined with strong future growth prospects in
emerging markets have prompted foreign investor interest in emerging markets.
Exhibit 16
A decline in cross-border lending, particularly Western European
interbank lending, explains the difference in capital flows between
2007 and 2010
Global cross-border capital inflows, 200710
Lending
Debt securities
Equity securities
Foreign direct
investment
Total 2010
4.4
1.3
1.5
0.7
0.9
Lending
-3.8
Debt
securities
-1.1
Equity
securities
-0.3
Foreign direct
investment
-1.3
Total 2007
10.9
5.2
2.6
0.9
2.2
61 percent ($2.3 trillion)
of total decrease in
lending due to decline
in Western European
interbank lending
% of total decline 20 60 4 16
Capital flows to developed countries are 20percent
more volatile than flows to emerging markets
Quarterly data highlight the volatility of cross-border capital flows. But contrary to
conventional wisdom, flows to developed countriesnot emerging marketsare the
most volatile. Capital flows to emerging markets averaged $226billion per quarter
from 2000 through 2010, peaking at $520billion during 2005 and 2006. Capital
flows to developed countries were much higher, averaging $1.1trillion per quarter.
However, these flows were much more volatile, with a high of $3.4trillion in the first
quarter of 2007 and a low of minus $2.0trillion in the final quarter of 2008. Overall,
we calculate that capital flows to developed countries, adjusted for their size, are
20percent more volatile than flows to emerging markets. We can partly explain
this difference in volatility by comparing the composition of capital flows between
developed countries and emerging markets. From 2000 to 2010, FDI, the least volatile
type of flow, comprised 53percent of total capital flows to emerging markets. But in
developed countries, highly volatile cross-border lending flows are the largest type of
capital flow.
Exhibit 17
Capital flows to emerging markets are smaller but more stable than
flows to developed countries
Cross-border capital inflows to developed countries
and emerging markets, Q1 2000Q4 2010
35
8
13
10
21
53
Interbank
lending
Lending to
nonbank
sectors
Debt
securities
Equity
securities
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
30
Emerging markets were net capital exporters in 2010
with $922billion of outflows, 31percent more than
inflows
Foreign capital flows into emerging markets totaled $702billion in 2010. This was
only half of their peak of $1.5trillion in 2007 but four times their level of 2000. Flows
to Latin American countries surged in comparison with the previous year to a total
of $254billion. Flows to the Commonwealth of Independent States (CIS) were
second-largest among developing economies at $97billion and flows to China the
third-largest at $84billion. Of the total capital flows to emerging markets, foreign
direct investment accounted for the largest share at 36percent, followed by foreign
purchases of debt securities (27percent), cross-border lending (23percent), and
foreign purchases of equity securities (14percent). While these flows reflect strong
fundamentals in many emerging market regions, they have has also stoked fears of
asset bubbles, unwanted exchange-rate appreciation, and overheatingin Brazil,
for instance. At the same time, emerging markets are becoming an increasingly
important source of foreign capital. Emerging markets were net capital exporters
in 2010, as outflows totaled $922billion, 31percent more than inflows. About
55percent of this capital outflow came from central bank purchases of foreign-
exchange reserves. However, emerging market corporations are now a growing
source of FDI, reaching $159billion in 2010.
Exhibit 18
Capital outflows from emerging markets remained significant even after
the crisis, totaling $922 billion in 2010
Cross-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
27 15
132
6 1
405 382
127
173 40
60
21
79
50
22
35
1
11
1
6
16
6
2
-10
-4
Sub-Saharan
Africa
18 9
Middle East and
North Africa
26
8
12
India 67
Other emerging
Asia
77 23 25
36 45 12 -14
China 84 27
Commonwealth of
Independent States
97 13 28
Latin America 254 59 76
Central and
Eastern Europe
79
7
Inflows Outflows
Lending Debt Equity FDI Reserves FDI Other
Global foreign investment assets hit a historical high of
$96trillion in 2010
Reflecting growth in global capital flows, the worlds stock of foreign investment
assets also increased in 2010. Global foreign investment assets reached a historical
high of $96trillion in 2010, nearly ten times the amount in 1990. Central bank foreign
reserves were the fastest-growing component, reaching $8.7trillion by the end
of 2010, a sizable share (9percent) of the worlds financial stock that is invested
in government bonds and other low-risk securities. Foreign direct investment
assets of companies reached a new high of $21trillion, as did the stock of foreign
debt securities held by institutional and private investors. Banks expanded their
international lending, with the stock of cross-border loans returning to its 2007 level
at $31trillion. The degree to which financial integration will continue into 2011 and
beyond will depend not only on international macroeconomic prospects but also
on the international regulatory framework still under construction in response to the
2008 financial crisis.
Exhibit 19
Equity
securities
FDI
Foreign
reserves
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
25
Loans
Debt
securities
17
15
15
5
2005
62
20
14
11
12
5
2000
35
13
6
7
8
2
95
16
7
3
2
3
1
1990
10
6
1
1
2
1
Global FIA
% of global
GDP
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
The stock of global foreign investment assets reached $96 trillion in 2010
55 66 107 134 156 170 138 162 161
200009 200910
Compound annual
growth rate
%
32
The global web of cross-border investments in 1999
centered on the UnitedStates and Western Europe
Global financial integration began in earnest in the 1990s. Companies from
developed countriesand particularly the UnitedStatesbegan to invest abroad,
and investors sought to diversify their portfolios internationally. By the end of 1999,
the stock of foreign investment assets had already become significant, reaching
$28trillion, or 79percent of global GDP. The largest cross-border ties were between
the UnitedStates, Western Europe, and to a lesser extent Japan. At that time, the
UnitedStates was partner to 50percent of all outstanding international financial
positions. Linkages to emerging marketsChina, other parts of emerging Asia,
Latin America, and Central and Eastern Europewere small, in most cases less
than $1trillion. Investors in developed countries had limited information on emerging
market opportunities and, after the 1997 Asian financial crisis, feared potential
macroeconomic and political instability. Investors in emerging markets had limited
access to financial markets in other parts of the worldin fact, many emerging
markets lacked even a domestic financial system that facilitated an outflow of capital
by companies and households.
Exhibit 20a
In 1999, cross-border investing was taking hold
35%
($1.01.8)
0.51%
($0.20.4)
510%
($1.83.5)
10%+
($3.5+)
13%
($0.41.0)
1 Includes total value of cross-border investments in equity and debt securities, loans and deposits, and foreign direct
investment.
Figures inside bubbles are regional financial stock
Lines between regions show total cross-border investments
1
Total value of cross-
border investments
between regions
% of world GDP
($ trillion)
World GDP, 1999 =
$35 trillion
Total domestic
financial assets,
1999 ($ trillion)
Japan
Latin
America
Middle East, Africa,
and Rest of World
North
America
Australia and
New Zealand
Other Asia
Russia and
Eastern Europe
Western
Europe
22.7
1.8
1.7
40.8
0.5
7.0
1.5
35.3
By 2009, the web of cross-border investments had
grown more complex
During the 2000s, the growing stock of foreign investment assets included not only
increased cross-border investment between the traditional centers of financial
wealth, but also the growth and development of financial linkages with emerging
markets. By 2009, the US share of total cross-border investments had shrunk to
32percent, down from 50percent in 1999. This reflected both a surge in cross-
border investments within Western Europe following the creation of the euro and
phenomenal growth in the size and complexity of linkages with emerging markets.
Eastern Europe, the Middle East, Latin America, Africa, and emerging Asia now all
hold significant cross-border positions with Western Europe. Moreover, there are
now a number of south-south linkages between different emerging market regions
as governments and corporations in these countries become more active players
in global markets. Latin America, for instance, has roughly the same amount of
cross-border investments with emerging Asia as it does with Western Europe. These
financial connections between emerging markets are growing much faster than
those with the UnitedStates. Before the 2008 global financial crisis, international
investments between emerging Asia, Latin America, and the Middle East were
growing at an average rate of 39percent per yearroughly twice as fast as their
investments with developed countries. In short, the web of cross-border investments
is changing as the economic and political connections between diverse regions
proliferate and deepen.
Exhibit 20b
Cross-border investments had grown substantially by 2009
35%
($1.72.9)
0.51%
($0.30.6)
510%
($2.95.8)
10%+
($5.8+)
13%
($0.61.7)
1 Includes total value of cross-border investments in equity and debt securities, loans and deposits, and foreign direct
investment.
Figures inside bubbles are regional financial stock
Lines between regions show total cross-border investments
1
Total value of cross-
border investments
between regions
% of world GDP
($ trillion)
World GDP, 2009 =
$58 trillion
Total domestic
financial assets,
2009 ($ trillion)
Japan
Latin
America
Middle East, Africa,
and Rest of World
Australia and
New Zealand
Other Asia
Russia and
Eastern Europe
Western
Europe
26.8
6.6
7.9
64.0
4.3
29.0
4.0
63.1
North
America
34
Investors from developed countries hold 87percent of
global foreign investment assets
The UnitedStates is the worlds largest foreign investor, with $15.3trillion in foreign
assets, followed by the United Kingdom with $10.9trillion and Germany with
$7.3trillion. However, looking at the net position of each countrys foreign assets and
liabilities reveals a different picture. The UnitedStates is also the worlds largest net
foreign debtor, with foreign liabilities exceeding assets by $3.1trillionequivalent
to 21percent of GDP. This reflects the low US saving rate and persistent current
account deficit that has to be funded through net foreign borrowing. Spain is the
worlds second-largest foreign debtor with net debt of $1.3trillion or 91percent of
GDP. On the creditor side, Japan remains the worlds largest net foreign creditor,
with net assets of just over $3trillion. This may seem surprising given that Japan has
the worlds largest government debt at more than 200percent of GDP. However,
Japanese savers, banks, and corporationsnot foreign investorshold more than
90percent of this debt. At the same time, Japan has significant foreign investment
assets including roughly $1trillion of central bank reserve assets, $830billion in
foreign direct investment abroad, $3.3trillion of foreign equity and debt securities,
and $1.6trillion in foreign lending and deposits. China is the second-largest net
foreign creditor. Foreign investment assets owned by high-saving emerging
markets, particularly in Asia and the Middle East, have grown at twice the pace
of those of mature countries since 2000. This reflects companies, households,
and governments diversifying their portfolios internationally and tapping into
opportunities abroad. More broadly, the growth of foreign investment positions
reflects the integration of the global economy and financial markets.
Exhibit 21
In 2010, the United States was the worlds largest foreign debtor and
Japan the globes largest foreign creditor
1 Calculated as foreign investment assets less foreign investment liabilities.
Largest net foreign debtors
1
Largest net foreign creditors
1
-308
-325
-331
-355
-446
-453
-703
-752
-1,263
-3,072
360
492
585
626
691
698
882
1,207
2,193
3,010
15,284 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
1,376
1,122
1,699
6,116
202
2,348
2,032
389
198
884
762
Net position, 2010
1
$ billion
Assets Liabilities
United
States
Spain
Australia
Brazil
Italy
United
Kingdom
Mexico
Greece
France
Poland
Japan
China
Germany
Saudi Arabia
Switzerland
Hong Kong
Taiwan
United Arab
Emirates
Singapore
Norway
www.mckinsey.com/mgi
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Related McKinsey Global Institute publications
Farewell to cheap capital? The implications of long-term shifts in global
investment and saving (December 2010)
By 2020, half of the worlds saving and investment will take place in emerging
markets, and there will be a substantial gap between global investment demand
and the worlds likely saving. This will put upward pressure on real interest
rates and require adjustment by financial institutions, nonfinancial companies,
investors, and policy makers.
December 2010
Farewell to cheap capital?
The implications of
long-term shifts in global
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Debt and deleveraging: The global credit bubble and its economic
consequences (January 2010)
The recent bursting of the great global credit bubble has left a large burden of
debt weighing on many households, businesses, and governments, as well as
on the broader prospects for economic recovery in countries around the world.
Leverage levels are still very high in ten sectors of five major economies. If history
is a guide, one would expect manyyears of debt reduction in these sectors,
which would exert a significant drag on GDP growth.
January 2010
Debt and deleveraging:
The global credit bubble and
its economic consequences
Global capital markets: Entering a new era (September 2009)
World financial assets fell by $16trillion to $178trillion in 2008, marking the
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Global capital markets:
Entering a new era
September 2009
The new power brokers: How oil, Asia, hedge funds, and private equity are
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The power brokers collective performance in the financial crisis, though better
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rapid growth interrupted.
July 2009
The new power brokers:
How oil, Asia, hedge funds,
and private equity are faring
in the financial crisis
August 2011
Copyright McKinsey & Company
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