The Globe and Mail, Tara Perkins, 9 July 2007
Easy profits at home have prevented financial markets firms from becoming global players, and that could soon haunt them as domestic opportunities fizzle, a new study suggests.
Financial markets firms - such as banks, brokers and mutual fund companies - come in near the bottom of a ranking of sectors when it comes to tapping international markets, says a study to be released today by IBM Corp. and the Economist Intelligence Unit.
The study stacked up sectors based on the proportion of their sales, assets and shareholders that are foreign. It found that the financial industry is easily beat by sectors such as food and beverages, mining, consumer goods, motor vehicles, pharmaceuticals and telecommunications.
"Aspirations aside, financial markets firms are not yet very global," said the study, called Get global, get specialized or get out: Unexpected lessons in global financial markets.
The biggest reason financial firms haven't conquered foreign markets is likely that they had plenty of profitable opportunities at home, it said. "But those easy days are gone. Innovation, if confined to veteran markets, is not going to be enough to maintain the margins that many financial markets firms have come to expect."
Worldwide, investable assets are expected to double by 2015 to almost $300-trillion (U.S.), and soar further to $700-trillion by 2025. But 60 per cent of that future growth is going to come from developing or "prospect" markets. That's more than twice the contribution that "veteran" markets - such as the United States, Britain, Japan and Canada - will make, the study said.
"In addition to the well-known BRIC [Brazil, Russia, India, China] markets, the next frontier is likely to include countries such as South Korea, Indonesia, Turkey and Mexico, where lower anticipated country risk is complemented by accelerated growth in GDP per capita and heightened sophistication of the financial sector," the study said.
Currently, deposits dominate the investment profile in many prospective parts of the world. But the report says that the securities-to-deposits ratio in prospect markets will be much closer to the typical veteran profile by 2025. "By 2020, the worldwide wealth tied to securities will likely surpass currency and deposits," it said.
That marks a massive shift in financial product consumption.
The study also ranked countries by the sophistication of their financial sectors, with Canada coming in fifth. "Despite having a relatively low stock market capitalization, Canada scores highly in most other criteria and very highly overall," it said.
But markets like Canada will represent an increasingly smaller portion of the available opportunities.
Between 1950 and 2007, the developed nations' share of the world's population shrank from 33 per cent to 20 per cent. Last year, China surpassed London and New York in initial public offering listings for the first time. The 2006 deal value of China's three largest exchanges - Shenzhen, Shanghai and Hong Kong - totalled $53-billion, surpassing London ($48-billion), and the New York Stock Exchange and Nasdaq combined ($46-billion).
And in the past five years, the number of IPOs in the United States has fallen by one-third. "Clients have been test-driving other markets, and the switching costs that historically kept them close to home have largely been overcome," the study said. There has been a flight of capital as taxation, litigiousness and regulation become increasingly onerous in veteran markets, the study said.
Moreover, much of the talent is increasingly coming from abroad. By 2017, it expects that prospect markets will be providing more than half of the financial industry's talent.
Of all their assets, financial markets firms' human employees present the biggest challenge to manage, the report said. It singled out HSBC Holdings PLC - which hunts down candidates from around the world and usually has them trained outside of their home region - as an example of what more firms should do.
"It might sound heretical - given the high salaries and enviable perks they offer - but many financial markets firms may be neglecting the people-related implications of running a global business," the study said.
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Easy profits at home have prevented financial markets firms from becoming global players, and that could soon haunt them as domestic opportunities fizzle, a new study suggests.
Financial markets firms - such as banks, brokers and mutual fund companies - come in near the bottom of a ranking of sectors when it comes to tapping international markets, says a study to be released today by IBM Corp. and the Economist Intelligence Unit.
The study stacked up sectors based on the proportion of their sales, assets and shareholders that are foreign. It found that the financial industry is easily beat by sectors such as food and beverages, mining, consumer goods, motor vehicles, pharmaceuticals and telecommunications.
"Aspirations aside, financial markets firms are not yet very global," said the study, called Get global, get specialized or get out: Unexpected lessons in global financial markets.
The biggest reason financial firms haven't conquered foreign markets is likely that they had plenty of profitable opportunities at home, it said. "But those easy days are gone. Innovation, if confined to veteran markets, is not going to be enough to maintain the margins that many financial markets firms have come to expect."
Worldwide, investable assets are expected to double by 2015 to almost $300-trillion (U.S.), and soar further to $700-trillion by 2025. But 60 per cent of that future growth is going to come from developing or "prospect" markets. That's more than twice the contribution that "veteran" markets - such as the United States, Britain, Japan and Canada - will make, the study said.
"In addition to the well-known BRIC [Brazil, Russia, India, China] markets, the next frontier is likely to include countries such as South Korea, Indonesia, Turkey and Mexico, where lower anticipated country risk is complemented by accelerated growth in GDP per capita and heightened sophistication of the financial sector," the study said.
Currently, deposits dominate the investment profile in many prospective parts of the world. But the report says that the securities-to-deposits ratio in prospect markets will be much closer to the typical veteran profile by 2025. "By 2020, the worldwide wealth tied to securities will likely surpass currency and deposits," it said.
That marks a massive shift in financial product consumption.
The study also ranked countries by the sophistication of their financial sectors, with Canada coming in fifth. "Despite having a relatively low stock market capitalization, Canada scores highly in most other criteria and very highly overall," it said.
But markets like Canada will represent an increasingly smaller portion of the available opportunities.
Between 1950 and 2007, the developed nations' share of the world's population shrank from 33 per cent to 20 per cent. Last year, China surpassed London and New York in initial public offering listings for the first time. The 2006 deal value of China's three largest exchanges - Shenzhen, Shanghai and Hong Kong - totalled $53-billion, surpassing London ($48-billion), and the New York Stock Exchange and Nasdaq combined ($46-billion).
And in the past five years, the number of IPOs in the United States has fallen by one-third. "Clients have been test-driving other markets, and the switching costs that historically kept them close to home have largely been overcome," the study said. There has been a flight of capital as taxation, litigiousness and regulation become increasingly onerous in veteran markets, the study said.
Moreover, much of the talent is increasingly coming from abroad. By 2017, it expects that prospect markets will be providing more than half of the financial industry's talent.
Of all their assets, financial markets firms' human employees present the biggest challenge to manage, the report said. It singled out HSBC Holdings PLC - which hunts down candidates from around the world and usually has them trained outside of their home region - as an example of what more firms should do.
"It might sound heretical - given the high salaries and enviable perks they offer - but many financial markets firms may be neglecting the people-related implications of running a global business," the study said.
