Long-term perspectives

The world economy is expected to grow at around 3.5% a year over the coming decade. There will be continued productivity gains due to global competition, the diffusion of new technologies and growing population. This effect may be somewhat dampened by slowing employment growth due to demographic shifts towards older populations in some countries.

We expect the largest growth rates to occur in the emerging world, notably in Asia, followed by Eastern Europe, Latin America and the Middle East. Although North America and Western Europe are set to grow at slower rates than Asia, the absolute GDP increases will be higher in view of their size. This underlines the importance in our industry of having a significant presence in both the US and Western Europe.

The financial services sector has been growing faster than the economy for many years. Financial innovation, closely linked to the evolution of securities markets, will continue to be the engine for further development in the financial sector. We see several specific factors driving the development of our industry over the coming decades:

– financial liberalization and deregulation

– wealth accumulation

– retirement provisioning

– securitization

– equitization

– alternative investments

– corporate activity / restructuring

– energy and raw materials

These terms, and their distinct impact on our businesses, are explained in more detail below.

Financial liberalization and deregulation

Over the past few decades, deregulation and liberalization in financial services have accelerated the industry’s expansion and triggered considerable improvements in the quality and variety of new financial services. This process is now well advanced in many countries, and in some markets, for example the US, we do not expect any further notable deregulation. On the contrary, new regulations are arising in the US and some other developed countries, increasing the costs of doing business. However, further liberalization is likely in emerging economies where domestic markets are currently still relatively protected. These countries are exploring deregulation as a way to increase their competitiveness, especially compared with developed nations. The World Trade Organization’s (WTO) multilateral trade negotiations under the Doha Round are currently trying to address some of these issues, but progress remains halting.

In general, further liberalization of financial markets is expected to benefit investment banking and securities firms that are positioned to take advantage of any further opening of individual domestic capital markets. Asset managers with a global platform should benefit from the facilitation of cross-border mutual fund business.

Wealth accumulation

In many economies, a notable shift is taking place away from labor-intensive production to more capital-intensive activity. Based on this development, we see a clear trend towards individual wealth accumulation that is likely to continue over the next decade, particularly in Asia. Wealth is expected to grow faster than GDP in developed countries. Moreover, the ratio of wealth to GDP in emerging markets is currently low and should increase, due, among other factors, to generally higher saving rates. These developments will benefit wealth management businesses across the world. They will also help the asset management industry as private wealth is a key driver for institutional asset growth. Investment banks and securities businesses should also benefit thanks to rising capitalization levels in global financial markets and higher trading volumes.

Retirement provisioning

In coming decades, most developed countries will be confronted with major demographic shifts. Thus, pension reform is on the agenda of many governments across the world. The strong reliance in Continental Europe and Japan on unfunded schemes will make reform especially urgent. Although each country will follow its own regulatory agenda, in general we see a gradual shift from public unfunded to private funded pension schemes.

Institutional asset management is the sector most significantly affected by this trend, but investment banking and wealth management also benefit. In asset management, the focus will not only be on serving clients with investment advice and assuming management of pension mandates, but also addressing other issues that current and potential clients have to deal with, particularly for underfunded corporate pension funds.

Investment banks have recently started to serve pension funds in the area of liability-led asset management advice, where derivatives and structured products are used. In wealth management, we believe that current developments will influence the demand for retirement-specific products. Individuals go through different stages in life. While the first four to five decades of an individual’s life are usually dominated by wealth accumulation, private clients usually experience a mind-set change when they enter their sixth decade; the focus shifts from wealth accumulation to wealth protection. Appropriate products and services are needed in order to prepare these individuals for their retirement, representing a substantial growth area for the financial services industry.

Securitization

The transformation of financial services over the last ten to twenty years has included the increasing de-emphasis of traditional lending activities and the increasing importance of securities trading and financial markets. Corporations are now frequently in a position to directly meet their funding needs by accessing the capital markets. This has driven the long-term expansion of corporate bond markets, replacing traditional bank lending services. At the same time, an increase in bank assets such as loans, mortgages and receivables has fuelled growth in the securitization of these assets, increasing the volume of asset-backed securities.

We expect these trends to continue. In continental Europe securitization is still catching up with the US. In many emerging markets, the corporate bond market is still underdeveloped but growing fast. The ability of financial market participants to assess counterparty risk will further improve, facilitating financing by way of the securities market. Additionally, as the number of listed companies increases, they will have to conform to the transparency standards required by listing, and thereby meet requirements for also issuing debt securities.

Equitization

Over the past ten years, global equity market capitalization has grown at an annual rate of over 10% on a US dollar basis. Institutional and individual investors tend to allocate a greater share of their assets in equities. This reflects the transfer of ownership of assets from government and private owners to public markets. The corporate sector will also increasingly rely on public equity financing. We believe that the underlying trend towards an increasing role of equity financing and equity investments remains intact. In Western Europe, we see significant growth potential because of continued financial market integration. Growth potential is even higher in the emerging markets in view of the relatively low levels of stock market capitalization compared with GDP. Equitization is expected to provide growth opportunities not only to investment banking and securities businesses, but also to wealth and asset managers, as assets are increasingly shifted into higher margin classes. In addition, with the continued commoditization of trading services, we believe that smaller providers will start outsourcing these services to larger competitors.

Alternative investments

The last two decades have seen robust growth in the use of alternative investments – meaning investments other than cash, bonds, or public equities. North America led the way, with real estate and private equity becoming significant components of portfolios from the early 1980s, while hedge funds, once considered a fringe investment, continue to move into the mainstream across the globe. An increasing number of investors rely on alternative investments to boost returns and increase portfolio diversification. New alternative asset classes continue to emerge. This increases the demand for a variety of sophisticated products from the providers of these asset classes. These services range from IPOs and leveraged finance for private equity firms to prime brokerage and administrative services for hedge funds.

Corporate activity / restructuring

The search for growth, trade liberalization and technological progress will continue to increase global competition for corporations, pressuring them to concentrate on activities where they are genuinely competitive. At the same time, the complexity of doing business is increasing, for example because of regulatory restrictions. We see long-term trends pointing towards growing demand for advice on mergers and acquisitions and restructuring.

Energy and raw materials

Production capacities for energy and raw materials currently lag behind rising global demand, particularly from emerging economies. This has shifted the focus to the efficient allocation of commodities, similar to efficient resource allocation in capital markets. Energy and raw material markets are becoming steadily more similar to financial markets. Financial firms are buying and selling futures or making private financial contracts (derivatives) with other players. With clients asking for more sophisticated products and services in the commodities area, financial firms are in an ideal position to profit from these developments, as they apply their experience of capital markets.