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Companies Face $12 Trillion ‘Equity Gap’ By 2020, McKinsey Says

Dec. 8 (Bloomberg) -- Global companies’ demand for equity capital may outstrip supply by about $12.3 trillion in 2020 as investors avoid stocks, spurring firms to take on more debt and leaving them vulnerable during recessions, McKinsey & Co. said.

Investors may cut their equity holdings to 22 percent of total investments by 2020 from 28 percent now, according to a report from the research unit of McKinsey, the international consulting firm. Companies in 18 emerging and developed nations examined by McKinsey will need to raise $37.4 trillion of additional capital to support growth, exceeding the $25.1 trillion of new money invested into stocks, the firm said.

The shift away from stocks may be driven by the growing proportion of financial assets in emerging countries, where investors tend to have most of their holdings in bank deposits and government securities, McKinsey said. Companies that can’t lure equity investors may add debt instead, leading to more bankruptcies during recessions and bigger swings in economic cycles, according to the report.

“Most of the emerging equity gap would occur in developing nations,” wrote Richard Dobbs, a Seoul-based director of McKinsey Global Institute and co-author of the study. “The probable outcome is a world in which the balance between debt and equity has shifted.”

Banks, under pressure from regulators to raise more capital after government bailouts during the 2008 financial crisis, may find it more costly as investors shun shares, McKinsey said. The MSCI All-Country World Financials Index has tumbled 19 percent this year, compared with an 8.4 percent drop in the 10-industry MSCI All-Country World Index.

Emerging Influence

Financial assets in developing countries may triple to $141 trillion, or 36 percent of the global total, by 2020 from 21 percent last year, according to McKinsey. More than 60 percent of investors in emerging Asian economies said they prefer to keep savings in deposits rather than in mutual funds or equities, according to the study.

Emerging market investors would need to triple their allocations to equities to meet the needs of companies, an “unlikely scenario,” McKinsey said.

Developing economies may expand 6.1 percent as a group next year compared with 1.9 percent growth in advanced countries, according to September forecasts by the Washington-based International Monetary Fund.

“A key question for the future of global financial markets is the speed and extent to which investors in these countries will develop a larger appetite for equities and other financial instruments and diversify their portfolios,” Dobbs wrote.

In developed nations, aging populations will lead to lower investment in equities, according to McKinsey. Higher allocations to alternative investments, low returns from stocks during the past decade and smaller proprietary investments in equities by banks may also fuel the change, the report said.

“A shift away from equity in the global financial system is an important trend and, in our view, an unwelcome one,” Dobbs wrote. “Governments and business leaders share a common interest in expanding the supply of equity to the world economy.”

To contact the reporter on this story: Michael Patterson in London at mpatterson10@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net

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