McKinsey Report on Global Capital Markets

The McKinsey Global Institute, the economic research group of McKinsey & Company (a leading international consulting firm) has released a report--The New Power Brokers: How Oil, Asia, Hedge Funds, and Private Equity are Shaping Global Capital Markets. The report analyzes petrodollar investors, Asian central banks, hedge funds and private equity funds and focuses on their collective impact on global capital markets. The findings include:

• These four groups held $8.4 trillion in assets in 2006, which represents a tripling in the value of their holdings since 2000
• These assets will increase to $20.7 trillion by 2012; worst case estimate is $15.2 trillion (oil at $50 per barrel)
• These four groups hold about 12 percent of total worldwide assets under professional management; the remainder are held by pension funds, mutual funds and insurance companies
• Petrodollar investors are the largest group of the four with $3.4-3.8 trillion in financial assets, of which only 60 percent is held by foreign governments
• Asian central banks hold $3.1 trillion in financial assets, of which 63 percent is held by China and Japan ($1.1 and $.875 trillion respectively)
• Hedge funds controlled assets totaling $1.5 trillion and private equity funds $800 billion at the end of 2006
• Hedge funds and private equity funds will have investments from petrodollar investors and Asian central banks of $720 billion by 2012
• The investment preferences of these investors is for long term equity, alternative investments and for markets outside the U.S. and Europe

My conclusions from the report are:

1. Interest rates and bond yields will stay low for a very long time given the demand for financial assets from these four groups
2. Federal Reserve efforts to manage the economy through interest rate adjustments may not be as effective as in the past given the large pool of capital outside U.S. control
3. Asia clearly has the financial wear withal to satisfy its demand for increasingly more expensive commodity manufacturing inputs, which suggests that the U.S. ability to manage inflation may become increasingly complex
4. Latin America lacks the cultural affinity to attract investment from these four groups given the ties of this money to other emerging markets, which suggests that outside the natural resources sector Latin American economic growth rates may fall further behind other emerging markets
5. The ability of companies in Indonesia, Philippines, Vietnam, Malaysia and Thailand to access sophisticated funding sources will increasingly become a major strategic advantage and perhaps the only way to survive the inevitable market entry of soon to be multinational Chinese and Indian companies
6. The pool of money held by the four groups is almost completely unregulated, which suggests that unscrupulous behavior will in large part be controlled by self-interest

The complete report can be downloaded here. (You may have to register.) The report was originally published in 4th quarter 2007.

I found this report on Infectious Greed.