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Jan 22, 2019

Asia could dominate global capital markets in two decades

Global share of Asian capital markets estimated to rise to 49 percent

Asian markets could gain the lion’s share of global capital markets over the next two decades, according to the New Financial Global Capital Markets Growth Index.

The index estimates the average global share of Asian capital markets will increase from 31 percent in 2017 to 49 percent in 20 years, with half the growth expected to come from China.

The biggest area of growth will be the annual flow of capital markets financing, with the index suggesting it will double from 24 percent of global activity today to 46 percent in 20 years. That will render Asia-Pacific growth three times faster than growth in the Americas and EMEA.

The estimate assumes future growth in GDP and market depth will continue at half the rate seen over the past few decades.

Measuring the average share of total capital market activity across 25 sectors in 2017, Singapore is the 11th biggest capital market, contributing 1.5 percent despite ranking 35th in GDP size. In terms of size of capital markets relative to GDP, Singapore comes second with a score of 248, behind Hong Kong’s 261.

The New Financial Global Capital Markets Growth Index, developed by the Global Financial Markets Association (GFMA) and capital markets advisory firm New Financial, also shows an over-reliance on banks for funding, particularly in regions outside North America. 

In the US, funding is split between 26 percent bank lending and 74 percent bonds, while Asian and European economies are nearly three times more dependent on bank lending. The study concludes that this exposes economies to the cyclical nature of bank lending, which can quickly dry up after an economic shock.

In total, the index sampled 60 economies globally, which represent 93 percent of global GDP, 71 percent of the global population and between 95 percent and 99 percent of capital markets activity. The 13 Asia-Pacific economies sampled account for 27 percent of global activity.

Overall, Asia-Pacific has surpassed EMEA in capital market depth with a score of 72 to EMEA’s 64, and is fast catching up with the Americas, which scores 154. The measured sectors are derived from eight broad groups: pools of capital, equity markets, bond markets, leveraged loans and securitization, assets under management, corporate activity, private equity & venture capital and trading.

The stock markets are dominated by the Americas region with a combined market value of $37 tn – 43 percent of the report’s sample size – at the end of 2017, while Asia-Pacific accounts for 34 percent with $29 tn. By contrast, Asia-Pacific takes the lead for IPO activity with a total issuance of $87 bn in 2017, representing 44 percent of global IPO activity. 

Just over 80 percent of Asia activity came from emerging markets, with IPOs by Chinese companies accounting for just over half of all Asian activity. The Americas account for 28 percent and EMEA for 27 percent.

Mark Austen, CEO of the Asia Securities Industry & Financial Markets Association and former CEO of GFMA, comments in a statement: ‘While the economic and financial system in every economy is unique – and capital markets are at vastly different stages of development – our analysis shows there is huge potential for growth in capital markets around the world should the barriers to their development be adequately addressed by policy makers.’

Simon Lewis, CEO of the Association for Financial Markets in Europe, part of the GFMA alliance, adds: ‘Our joint report highlights that capital markets in Europe are currently punching below their weight when compared with the US and Asia. A big factor in this relative underdevelopment is the fragmented nature of the European economy, which reduces liquidity and raises the cost and complexity of investing. 

‘In Europe, reforming the capital markets through the Capital Markets Union (CMU) is therefore a key priority. CMU has the potential to change existing projected growth rates and will be even more important in light of the imminent challenges posed by Brexit.’