Download But in spite of this healthy picture, there is plenty to worry about

The Future of Global Financial Markets
and the Implications for Pensions
Howard Davies
Director - London School of Economics
Montreux
16 May 2006
Three topics:
1. The global economy: imbalances and all
that
2. Changing asset classes in financial markets
3. Regulation.
Over the last year, global GDP growth has
been remarkably synchronized.
E
In
di
a
C
hi
na
pa
n
Ja
U
K
uo
p
ea
n
U
S
Global GDP, %
10
9
8
7
6
5
4
3
2
1
0
And growth is forecast to continue
2007 GDP Forecasts: Economist Poll
9
8
7
6
5
4
3
2
1
0
?
E
In
di
a
C
hi
na
pa
n
Ja
U
K
n
pe
a
ur
o
U
S
?
Even in Europe, sentiment has been improving
Morgan Stanley Index of European Business Conditions
70
60
50 =
long-run
average
50
40
30
20
10
0
June, 2005
Sept, 2005
Dec, 2005
March, 2006
But in spite of this healthy picture, there is
plenty to worry about:
•slow growth and high unemployment in parts of
continental Europe, putting strains on the Euro,
•public sector and consumption-led growth in the UK
and, most importantly
•trade imbalances between the US and China which
threaten to revive protectionism in Washington
On one view, the problem is driven by
US trade and fiscal deficits
US Twin deficits
Source: US Bureau of Economic Analysis, Morgan Stanley Research
Which have led to a huge discrepancy in
consumption growth
Personal Consumption as a % of GDP
Source: China National Bureau of Statistics, Bureau of Economic Analysis, Morgan Stanley Research
and a massive difference in savings
rates between the US and China
US and China: Savings rates
Source: US Bureau of Economic Analysis, World Bank, Morgan Stanley Research
Though it is the trade deficits which have
attracted political attention
Trade Surplus/ Deficit 2004
200
100
0
-100
-200
-300
-400
-500
-600
-700
Japan
China
Rest of Asia
US
and the huge accumulated foreign
exchange reserves
H
on
g
K
on
g
In
di
a
ea
or
S.
K
Ta
iw
an
Ch
in
a
Foreign Reserves
900
800
$
700
billion
600
500
400
300
200
100
0
At some point, these balances ought to
begin to unwind
•The US is now a net debtor of $2.5 trillion
•Protectionist pressures in Washington represent the
most potent threat to the global economy
But when and how?
The Global Asset Management market is
changing as a result of these trends
EU
29%
Middle East
7%
Japan
7%
Australia
2%
Est c. $ 80
trn.
Asia/
Emerging
Markets
6%
US
49%
Growth rates
US 11%
Non- US
35%
There has been rapid growth in debt and
equity issues in Asia
Asian equity and debt issues
$
billion
100
90
80
70
60
50
40
30
20
10
0
equity
debt
2002
2003
2004
2005
In developed markets, the trend is away
from new equity raising to risk transfer
•Equity IPOs broadly flat as a percentage of GDP
in recent years
•US corporate bonds have doubled as a
percentage of GDP in 15 years
•Credit derivatives volume had rocketed
Private equity has grown dramatically
•US deal volume over $200 billion in 2005
•More than 100 $1 billion funds
•$ 2.5 trillion purchasing power
Too much money chasing too few deals?
Hedge funds have outperformed traditional asset
classes over the past five years
Risk-adjusted
Returns
2001-2005
10
8
6
Hedge Funds
US Bonds
Global Equity
US Equity
EU Equity
4
Annualised
Return
2
0
-2
0
10
20
-4
Standard Deviation
30
As a result, asset allocation is shifting:
•towards private equity
•towards hedge funds
•towards international equities
•towards other real investments
There is considerable change in prospect in
the regulatory environment:
•Basel 2
•MiFID
•More active enforcement
The effects of Basel ought to be:
•to align economic and regulatory capital more
closely
•to benefit diversifies and especially large retail
banks
•to promote more differential loan-pricing
The effects of MiFID ought to be:
•increased equity market competition resulting from
the removal of exchange concentration rules
•greater flexibility of execution by enabling
internalisation of trades across Europe
But
•significant implementation costs across the industry
The Future of Global Financial Markets
and the Implications for Pensions
Howard Davies
Director - London School of Economics
Montreux
16 May 2006