A report issued by the McKinsey Global Institute forecasts that investor allocation to equities worldwide will drop from 28 percent in 2010 to 22 percent in 2020. (“Equities Losing Appeal in Global Financial System,” InvestmentNews).
In developed countries, the reasons for this loss of appetite for equities include aging populations, shifts from defined benefit to defined contribution plans (participants are more equity-averse than pension fund managers), increased use of alternative investments, and the current low-return, high-volatility stock market, according to the report.
In emerging market countries, financial assets are rising, but most of them are held in bank deposits and government securities, according to McKinsey. Overall assets in emerging market countries are expected to increase to 36 percent of the global total versus 21 percent today.
The decline of equities over the next decade will result in a shortfall of investor demand for equities that is needed to fund companies’ growth, which will in turn cause the cost of equity to rise and equity to become less available, according to the report.
“This gap will amount to approximately $12.3 trillion in the 18 countries we model, and will appear almost entirely in emerging markets, although Europe will also face a gap,” the report said.
“At a time when the global economy needs to deleverage in a controlled and safe way, declining investor appetite for equities is an unwelcome development.” It forces companies to look to debt financing ? i.e., more leverage.
“With more leverage in the economy, volatility may increase as recessions bring larger waves of financial distress and bankruptcy.”
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