Barely a week seems to go by without some reminder as to how the developing world is increasing its global heft.
Emerging economies account for around two-thirds of global gross domestic product growth, for example, and three-quarters of foreign exchange reserves. They account for 85 per cent of the world’s population and 24 of the planet’s 30 largest cities.
Some have leapt to the forefront of technological innovation: developing anti-satellite missile systems, leading the world in quantum cryptography and even launching moonshots, to the dark side of the lunar surface, no less.
Yet there is one glaring omission from the torrent of statistics. For all the gains elsewhere, the developing world has made pitifully little progress in expanding its stock markets.
Emerging, frontier and sub-frontier countries accounted for just 12.4 per cent of world investable market capitalisation at the end of last year, a figure that has flatlined since 2007, according to calculations by Elroy Dimson, Paul Marsh and Mike Staunton, academics at London Business School.
Moreover, few see any sign of emerging markets making much of an impression in the coming years. If anything, expectations are going backwards.
Back in 2011, PwC asked 400 senior company executives from across the globe how they thought the world would look by 2025.
They painted a picture of developed world stock exchanges being under siege from thrusting go-ahead rivals in emerging markets. Just 18 per cent thought developed world stock markets had clear advantages that EM rivals would struggle to overcome by 2025. Three-quarters of respondents thought DM exchanges would need to work harder to continue to attract the listings of EM-based companies, with the same proportion suggesting EM companies would look to list on other EMs.
The consultancy, this time in cahoots with the Economist Intelligence Unit, has just published a follow-up report, this time looking ahead to 2030.
By then surely emerging markets would have made even more progress than pencilled in for 2025? Well, no, as it happens.
One key finding is that the share of executives thinking DM stock markets had strengths their emerging upstarts would struggle to overcome, has leapt threefold to 53 per cent.
Back in 2011, the survey respondents thought Shanghai would be the leading exchange for cross-border equity issuance by 2025, with 55 per cent saying it would be considered by foreign companies planning an initial public offering. That was well ahead of comparable figures for the likes of London and New York.
Now, even looking out to 2030, just 21 per cent think Shanghai will be in the running for foreign flotations. Expectations have soured just as sharply for exchanges in India (from 38 per cent to 22 per cent), Brazil (29 to 10) and Russia (11 to 2).
Since 2011, indeed, many of the biggest cross-border floats have been those of Chinese companies, such as Alibaba, Netease and JD.com, on the NYSE and Nasdaq exchanges. Last year alone 33 Chinese outfits followed this well-trodden path, raising a combined $9bn.
Beijing recently unveiled a counterpunch with the introduction of Chinese Depositary Receipts, designed to lure some of its US-listed technology giants back home, as well as entice foreign companies.
While it is early days, the initiative has so far drawn a blank: while HSBC said in October it was looking at the CDR structure and could potentially be the first foreign company to make use of it, nothing has happened since.
Partly as a result, the market capitalisation of the various US exchanges is now three times that of their rivals in Greater China, up from 2.7 times in 2011.
David Erickson, senior fellow in finance at the Wharton School at the University of Pennsylvania, argued in the report that much of the pullback in EM expectations was because of mundane factors.
Whereas in the past European companies such as Prada and L’Occitane have listed primarily in Hong Kong in order to raise their profile in their largest growth market, this was no longer a key consideration.
Furthermore, the creation of trading mechanisms such as Shanghai-London Stock Connect “provides an opportunity to raise companies’ profile in China and throughout Asia without the commitment and cost of a full listing”.
Two broader concerns have risen up the agenda since 2011, however. Far more business leaders now cite a perceived lack of liquidity and currency volatility (up from 7 per cent to 29 per cent) as reasons to avoid floating on EM stock markets, even as concerns over regulation have abated.
These are difficult issues for emerging markets to solve. If companies prefer to list on developed markets because of greater liquidity, then the advanced world’s exchanges are likely to pull further ahead.
As for EM currencies, the primary drivers of their fortunes remain movements in US interest rates and the dollar, as well as expectations for global growth.
If there is a bright spot it is that the rising levels of income and wealth in many emerging markets should, over time, facilitate the emergence of larger pools of domestic capital. But few see this happening in a meaningful way, this side of 2030.
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