New report from GFMA and New Financial offers policy recommendations to support the growth of deeper and more effective capital markets.
The GFMA (Global Financial Markets Association) and capital markets advisory firm New Financial have issued a new report presenting an analysis of the size, depth and growth potential of capital markets in 60 economies around the world.
The report highlights the wide range in the level of development of capital markets between different regions and jurisdictions, and seeks to help policymakers better identify and address barriers to deeper capital markets.
According to the report, while the US still has the largest and most developed capital markets in the world – more than three times the size of China’s – Hong Kong and Singapore scored the highest in market depth relative to GDP.
As a whole, Asia Pacific averages less than half the market depth measured in the US, but the region is “catching up fast”, the report says. Asia has already overtaken Europe in terms of size, accounting for 27 percent of global capital market activity, compared to 21 percent for the EU.
The report says Asia Pacific will account for as much as two thirds of the growth in capital markets activity in the coming 10 years. In the next 20 years, Asia will account for just under half of capital market activity, it says.
Part of this growth will come from a shift towards greater reliance on capital markets for funding such as through corporate bond issuances. Compared to the US, economies in Asia and Europe are nearly three times more dependent on bank lending, which can expose them to cyclical factors and economic shocks.
Additionally, there is “huge potential” to shift household savings into longer-term pools of capital by developing pension systems and encouraging more retail investment in Asia and Europe. In the US, just 12 percent of household financial assets are held in bank savings, compared with more than 30 percent in Europe and 40 percent in Asia.
But, the report says, “capital markets do not exist in a vacuum and bigger and deeper capital markets will not happen on their own. Efficient capital markets rely on a thriving business environment, stable government, and high levels of trust in the rule of law.”
The report offers a number of recommendations that governments and regulators should consider to support the growth of deep and effective capital markets, including:
- encouraging the formation of pools of capital through the development of workplace and private pensions
- promoting better financial literacy and a retail investment culture
- ensuring high standards of market integrity, investor protection, transparency and governance
- ensuring fair and reasonable market access including programmes for foreign investors
- addressing fragmentation across jurisdictions on funds marketing, registration, fees and reporting
- harmonising legal documentation to global standards for issuers, intermediaries and investors
- continuing to develop market infrastructure to simplify trading and ensure liquidity
- creating post-trading systems that are intergrated, harmonised, low-risk and low-cost
- opening up capital markets to greater competition
- facilitating and supporting innovative uses of technology and digitisation
According to the report, deeper capital markets can help support sustainable economic growth by providing a more balanced and efficient form of funding for companies than bank lending alone, improving productivity through more efficient capital allocation and better risk management, increasing capacity to absorb shocks, and funding more sustainable pension systems.
The full report is available here.