Some of the key Asia findings and recommendations are as follows:
While the findings confirm that the US indeed has the largest capital markets in the world today, they clearly illustrate that Asia is catching up very quickly and, even on conservative projections, will dominate growth in the next decade should policymakers address the barriers to their development. Asia Pacific has already overtaken European capital markets both in terms of size (Asia accounts for 27% of global activity compared with 24% for EMEA) and depth relative to GDP. Much of this is driven by China, which accounts for 40% of Asian capital markets activity and which has capital markets that are deeper than those in many large European economies.
Looking towards the future, Asian markets have the greatest growth opportunity and could gain the largest share of global capital markets over the next few decades. The balance of power will swing decisively towards Asia over the next 10 to 20 years, with the overall share of Asian markets increasing from an average of 31% today to 39% in 10 years and as much as 49% in 20 years.
The biggest area of growth for Asian markets will be the annual flow of capital markets financing, estimated to nearly double from 24% of global activity today to 46% in 20 years.
One of the biggest economic challenges facing governments around the world is how to ensure that companies have access to a wide range of funding to enable them to raise money to invest in jobs and growth. If economies are too reliant on bank lending, companies can be starved of vital funding as and when the financial cycle turns — as happened around the world in the wake of the financial crisis and in Asia in the 90s.
In every region outside of North America, companies are still heavily reliant on bank lending for their funding. Economies in Europe and Asia are nearly three times more dependent on bank lending. While there are clear structural differences in banking systems around the world, those regions that rely more on bank lending should follow the recommendations set out by the jurisdictions with more developed capital markets.
One measure of the level of development of capital markets around the world is the extent to which individuals are prepared to invest their savings in securities rather than keep them in the bank or on hand in cash. The US has a robust retail investment market, just 12% of household financials assets are in the form of cash or savings accounts, while 32% is in pensions or insurance products, which includes self-directed IRAs. The remainder is in investment accounts (stocks, bonds, or funds). In contrast, households in EMEA and Asia have 31% and 42% of their wealth in the form of bank savings and deposits respectively. If households in EMEA and Asia switched one-third of their cash to investments, it would transfer more than $12 trillion into long-term pools of capital.
Capital markets are predicated on legal certainty and fairness for all investors, as trust in the political and regulatory regimes of a jurisdiction are fundamental to efficient and liquid markets. The threat of politically-motivated interventions and unpredictable or non-transparent legal and regulatory regimes makes investors uneasy, thus policymakers should, among others, prioritize improving and aligning the rule of law for all market participants in a fair and transparent manner and ensuring proper regulatory consultations and transparency in the development and enforcement of regulations, so there is close private and public cooperation to ensure workability, market access, and stability.
Regulators and policymakers need to keep up with developments in fintech and find ways to facilitate innovation rather than create unnecessary barriers to new companies or to incumbents who adopt new technology, while at the same time protecting market stability and integrity. Solutions for policymakers include facilitating dialogue between regulators and firms developing or employing fintech solutions to help develop practical and workable regulatory frameworks, and ensuring a level playing field for all market participants by basing regulation on risks rather than on the technologies used.