KSA to grow as 7th largest emerging market by 2030
Credit Suisse forecasts Saudi Arabia to emerge as the seventh largest emerging capital market by the year 2030 (with the equity market growing to be the sixth largest emerging market from the current 10th position).
According to Credit Suisse estimates cited in a new report, Saudi Arabia would account for the second largest share of emerging ECM deal fees ($5.5 billion) over the next 17 years.
As a market with high retail ownership and a strong equity culture among high net worth individuals, secondary activity in equities should also prove to be a significant source of revenue, with average daily traded value expected to grow from $1.8 billion currently to $16.4 billion by 2030E.
The high forecast growth rate observed for Saudi Arabia would be consistent with a potential liberalization of the country’s markets, when the Saudi Capital Markets Authority proceeds with a reform package opening its bourse to direct foreign participation, thus creating significant additional external demand for Saudi assets.
Driven by accelerating growth in capital raising activities over the next one-and-a-half decades, emerging nation capital markets are expected to capture a more proportionate share of the global capital market universe relative to their economies, closing the gap with their developed peers, according to the Credit Suisse Research Institute’s “Emerging Capital Markets: The Road to 2030” report.
Despite rapid growth in capital-raising over the past two decades, emerging country capital markets remain underdeveloped relative to the size of their economies.
With a 39 percent share of global output – or 51 percent based on purchasing power parity, the 20 emerging nations currently only represent less than half of their fair share of the global capital market universe — accounting for only 22 percent of global equity market capitalization, and a 14 percent of the global corporate and sovereign bond markets.
The Credit Suisse Research Institute, however, forecasts that by 2030, Emerging Market share of global equity market capitalization will increase to 39 percent, while for corporate bonds and sovereign bonds to 36 percent and 27 percent respectively, around double their current market share.
“The disparity between developed and emerging nations in the global capital market universe will close by 2030. This should be driven by a disproportionately large contribution from emerging market equity and corporate bond supply and demand driven by growth in domestic mutual, pension and insurance funds, given the relatively high savings ratios prevalent among emerging economies. Moreover, the growing ability of Emerging Market corporates to access local currency capital markets shields them from the risk of exposure to unforeseen exchange-rate volatility,” says Stefano Natella, global head of equity research, Investment Banking, at Credit Suisse in New York.
Credit Suisse forecasts that the fastest 17-year nominal US dollar compound annual growth rate in market value of any asset class will be Emerging Market equities and corporate bonds at 13 percent, followed by Emerging Market sovereign bonds at 8 percent, doubling the growth pace of their developed peers.
Credit Suisse is forecasting growth in developed market equities, corporate and sovereign bonds to slow down at a pace of 7 percent, 5 percent and 3 percent, respectively. Consequently, the market value for emerging equities, corporate and sovereign bonds increases by $98 trillion, $47 trillion and $17 trillion, respectively, in nominal dollar terms between 2014 and 2030E, versus gains of $125 trillion, $52 trillion and $24 trillion, respectively, for these asset classes in the developed world.
“In this study, we extrapolate established historical patterns of growth in emerging and developed capital markets to assist in projecting their absolute and relative dimension and composition of market value by the year 2030. We find a strong relationship between the historical expansion of developed nation aggregate equity and corporate bond market value relative to GDP and gains in economic productivity. Thus, we used long-term projections of per capita GDP to make forecasts for both emerging and developed market equity and fixed income issuance over the 17 years to 2030,” explains Alexander Redman, Global Emerging Markets Equity Strategist, Investment Banking at Credit Suisse in London.
China equity market to overtake the UK and Japan in 2030
While the US will remain the largest equity market in 2030 with a capitalization of USD 98 trillion and a weight of 35 percent, China will overtake both the UK and Japan to become the second largest market with a $54 trillion capitalization and a weight of 19 percent. Cumulatively China has accounted for 40 percent ($639 billion) of the total emerging world equity capital markets deal value (initial public offerings and secondary public offerings) since 2000.
Over the next 17 years, China’s share will increase to 60 percent or $3.6 trillion, representing a 5.5 fold nominal increase.
The forecast is based on the assumption that China’s capital account liberalizes over the next 17 years, giving foreign investors access to the A-share market.
Similarly, Credit Suisse also forecasts China’s dominance of corporate bond market deal value in Emerging Markets over the last 14 years (a 37 percent share or $1.6 trillion of the total) will persist, eventually taking a 53 percent share (or $18.4 trillion) of total Emerging Market primary activity by 2030.
China will also represent the largest growth in corporate bond market value by 2030. Total issuance originating from China is projected to increase by nearly tenfold from $3 trillion in 2014 to $32 trillion by 2030, consistent with large-scale disintermediation by Chinese banks of state-owned enterprise and local government assets.
Emerging Markets to capture bigger share of underwriting fees
Credit Suisse also forecasts emerging countries not only will generate more underwriting fees, but will also capture a bigger share of the pie over the next 17 years. According to the report, total capital markets underwriting fees globally for the period from 2014 to 2030 will reach $638 billion in nominal terms, compared to the $307 billion in fees earned in the period 2000 to 2014. Of the fee pool, 40 percent or $256 billion is expected to be generated from Emerging Markets, versus a far smaller share of 16 percent (or $49 billion) since 2000.
The division of fees between equity and debt capital markets until 2030 will also be much more balanced (49 percent/51 percent, respectively), in comparison to a 67-33 percent split as recorded from 2000 to 2013.
The wallet share of equity and debt capital market fees captured by Emerging Market local brokers will also rise from 45 percent ($22 billion) from 2000 to 2013 to 58 percent ($149 billion) between 2014 and 2030E.
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