Companies Face $12 Trillion 'Equity Gap' By 2020
February 3, 2012
(Bloomberg News) Global companies' demand for equity capital may outstrip supply by about $12.3 trillion in 2020 as investors avoid stocks, spurring firms to take on more debt and leaving them vulnerable during recessions, McKinsey & Co. said.
Investors may cut their equity holdings to 22% of total investments by 2020 from 28% now, according to a report from the research unit of McKinsey, the international consulting firm. Companies in 18 emerging and developed nations examined by McKinsey will need to raise $37.4 trillion of additional capital to support growth, exceeding the $25.1 trillion of new money invested into stocks, the firm said.
The shift away from stocks may be driven by the growing proportion of financial assets in emerging countries, where investors tend to have most of their holdings in bank deposits and government securities, McKinsey said. Companies that can't lure equity investors may add debt instead, leading to more bankruptcies during recessions and bigger swings in economic cycles, according to the report.
"Most of the emerging equity gap would occur in developing nations," wrote Richard Dobbs, a Seoul-based director of the McKinsey Global Institute and co-author of the study. "The probable outcome is a world in which the balance between debt and equity has shifted."
Financial assets in developing countries may triple to $141 trillion, or 36% of the global total, by 2020 from 21% last year, according to McKinsey. More than 60% of investors in emerging Asian economies said they prefer to keep savings in deposits rather than in mutual funds or equities, according to the study. Emerging market investors would need to triple their allocations to equities to meet the needs of companies, an "unlikely scenario," McKinsey said.
"A key question for the future of global financial markets is the speed and extent to which investors in these countries will develop a larger appetite for equities and other financial instruments and diversify their portfolios," Dobbs wrote.
In developed nations, aging populations will lead to lower investment in equities, according to McKinsey. Higher allocations to alternative investments, low returns from stocks during the past decade and smaller proprietary investments in equities by banks may also fuel the change, the report said.