Capital Flows To Increase Sharply, Driven By Emerging Market Wealth

by: Research Recap

Oxford Analytica expects capital flows to grow rapidly as world financial wealth expands, especially in emerging market countries.

Given consensus forecasts for future global growth, total world financial wealth will probably rise to 450-550 trillion dollars range by 2020, up from today’s level of roughly 200-220 trillion dollars.Within this total, overall external financial wealth is likely to expand even faster thanks to gains on existing investments and the cumulative effect of new capital flows.

Indeed, in the most favourable scenario for capital flows, overall external wealth could reach 130-150 trillion dollars (about equal to forecast 2020 global GDP), corresponding to the high-end scenario for public sector external wealth of 35-40 trillion dollars. If the proportion invested in US Treasuries remains the same as today, this would imply foreign demand worth more than 20 trillion dollars by 2020 — significant support for US sovereign debt. Overall, prospective growth in external wealth should provide sufficient funding opportunities for indebted advanced economies. Nevertheless, US and European funding needs are heavily front loaded, suggesting that short-term pressures will need to be overcome.

More emerging market companies will become prominent global players, requiring investments abroad, while private investors will seek to diversify their wealth holdings.

Therefore, private sector capital outflows from developing countries will see rapid growth. Emerging markets’ stock of foreign direct investment (FDI) and other foreign assets will increase as a share of global GDP. At the same time, advanced-economy wealth is also diversifying into developing countries, especially given likely persistence of low interest rates across most of the OECD. Both global capital flows and external financial wealth look set to rise strongly over the next decade, outstripping growth in output.