World financial megatrends
Where will we be in the next 10 years?
2008: Post the continuing fallout from the sub-prime debacle, it’s hard to sound upbeat about the future of the world’s financial industry. As news of further multi-billion dollar write downs by Blue Chip banks continues to flood in, we are still finding out just how badly they failed to disaggregate risk from return. Yet it would be wrong to get too down. Powerful megatrends are emerging that will make finance, although not necessarily banking, a much, much bigger global player by 2018. So what are they?
New Arbiters of Capital
Above all, there will be a lot more investment capital available. Late last year, in a prescient piece of research, the McKinsey Global Institute forecasted that four actors; petrodollar investors, Asian Central Banks, Hedge Funds and Private Equity, are growing so fast, that they will become a major source of capital for companies around the world – with up to $21 trillion in assets by 2012. These “New Power Brokers” will go some way to compete and replace the traditional funders; households, families and businesses. They will also compete with mutual funds, insurance companies, pensions and banks as the intermediaries of capital.
New products and markets
For investors, the main new products that have emerged in the last 10 years are credit derivatives, exchange traded funds, contracts for difference and with them, a hitherto range of investments possibilities in commodities like coal and gold. For sophisticated investors, it is inevitable that the number of derivatives available will only increase. The really exciting trend though is in the creation of efficient new markets in largely unpriced assets and problem areas, like intellectual property, prediction, pollution and even smaller unlisted micro-securities.
Technology
The technology financial professionals had yesterday, nearly everyone has today. 10 years ago, only top finance professionals with expensive systems had easy access to company reports, share prices and briefings. Today, thanks to the internet and the falling cost of computing, retail investors have similar information reach and this information is mostly free. That same fast-growing computer power is going to accelerate further into real-time reporting, self-learning, semi-intelligent trading systems and much improved matching systems that boost liquidity by drawing in a wider pool of investors than ever before.
The comeback of the East has begun
After nearly 600 years of being asleep, China and India are working hard to return to their historical position of pre-eminent global economic strength. But they will still take at least another 50 years to equal western living standards today. In his best-selling book “The Dragon and the Elephant: China, India and the New World Order”, author David Smith calculated that even by 2050, both countries will still have living standards, up to 40% lower, than citizens living in Britain or America in 2005. That does not preclude though the enormous opportunities that arise when an extra 2 billion of the earth’s population are earning over $30,000 per year instead of $800-$1800. They will all want banking, mutual funds – everything the Western financial consumer has today and more.
10 years ago, some thought the NASDAQ and online day-trading were the final word in financial innovation. How wrong they were. Onerous regulations, fast-footed competition from London and further afield put paid to that. Stock markets though are small beer to the globe’s emerging population of financial consumers. Today, just under half of the world’s population, some three billion, own a mobile phone. Many of those owners still do not even have a bank account. As the mobile, not the computer becomes the core access point to the internet, that will change, fast. Meanwhile, the world’s billionaire population of 800 will triple over the next decade. Consequently, in the years to come, the fastest financial sector growth will be at the bottom and at the top of the global economy.
So don’t worry too much about the sub-prime crisis and bring on 2018 – because in the words of an old rock song, you ain’t seen nothing yet.
