Column : The great global equity famine

Dec 14 2011, 02:48 IST
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SummaryIt’s bad news. A McKinsey report says that, by 2020, investors around the world may allocate just 22% of their financial assets to equities, down from 28% today.

It’s bad news. A McKinsey report says that, by 2020, investors around the world may allocate just 22% of their financial assets to equities, down from 28% today. That could stymie plans of corporates: a study across 10 mature and eight emerging economies reveals they would need to mop up an estimated $37.4 trillion of additional capital to support growth, an amount that would exceed investor demand by $12.3 trillion. What’s worse is that most of this estimated shortfall would be seen in developing nations. There could be a way out: it’s possible, the report observes, that emerging market investors may acquire a bigger appetite for equities, and were they, over the next decade, to raise their equity allocations to levels currently seen in the US, demand and supply would match. That’s a long shot though and, as the report says, such a sudden shift in investor preferences would be ‘unprecedented’, requiring a bunch of initiatives designed to make the markets attractive to individuals. Only a tripling of allocations to equity would raise demand sufficiently, given that households, in most emerging markets, today prefer to put away their money in deposits; on average, they allocate less than 15% of financial assets to equities compared with 42% for US households.

The report is a well-timed wake-up call; 2011 has been a rather disastrous year for equities globally but more so for India, which will probably end up one of the worst performers. Of course, households today hardly play a role in the Indian market; foreign institutional investors have been the dominant players, for the most part, since they were allowed into the country in 1992. And although they are the largest investor class with 42% of all financial assets, equities accounted for just 8% of these assets in 2010. It wouldn’t be surprising if that share drops in 2011. While the government has attempted to develop an equity cult, and persuade small investors to park some of their savings in equities, it clearly hasn’t been enough. Indeed, the McKinsey report notes that while the wealth of Indian households is expected to grow rapidly in the coming decade, “the prospects for India to develop a significant equity investing culture are unclear”. In particular, the report cites the instance of the Securities and Exchange Board of India (Sebi) banning upfront sales charges, or “loads”, on mutual funds in 2009, which has caused distributors to

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