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Credit Suisse: Saudi Arabia to emerge as the seventh largest emerging capital market by 2030

July 23, 2014

Driven by accelerating growth in capital raising activities over the next one-and-a-half decades, emerging nation capital markets are expected to capture a more proportionate share of the global capital market universe relative to their economies, closing the gap with their developed peers, according to the Credit Suisse Research Institute'sEmerging Capital Markets: The Road to 2030 report.

Despite rapid growth in capital-raising over the past two decades, emerging country capital markets remain underdeveloped relative to the size of their economies. With a 39 per cent share of global output or 51 per cent based on purchasing power parity, the 20 emerging nations currently only represent less than half of their fair share of the global capital market universe - accounting for only 22 per cent of global equity market capitalization, and a 14 per cent of the global corporate and sovereign bond markets. The Credit Suisse Research Institute, however, forecasts that by 2030, Emerging Market share of global equity market capitalization will increase to 39 per cent, while for corporate bonds and sovereign bonds to 36 per cent and 27 per cent respectively, around double their current market share.

"The disparity between developed and emerging nations in the global capital market universe will close by 2030. This should be driven by a disproportionately large contribution from emerging market equity and corporate bond supply and demand driven by growth in domestic mutual, pension and insurance funds, given the relatively high savings ratios prevalent among emerging economies. Moreover, the growing ability of Emerging Market corporates to access local currency capital markets shields them from the risk of exposure to unforeseen exchange-rate volatility," says Stefano Natella, Global Head of Equity Research, Investment Banking, at Credit Suisse in New York.

Credit Suisse forecasts that the fastest 17-year nominal US dollar compound annual growth rate in market value of any asset class will be Emerging Market equities and corporate bonds at 13 per cent, followed by Emerging Market sovereign bonds at eight per cent, doubling the growth pace of their developed peers. Credit Suisse is forecasting growth in developed market equities, corporate and sovereign bonds to slow down at a pace of seven per cent, five per cent and three per cent, respectively. Consequently, the market value for emerging equities, corporate and sovereign bonds increases by $98 trillion, $47 trillion and $17 trillion, respectively, in nominal dollar terms between 2014 and 2030E, versus gains of $125 trillion, $52 trillion and $24 trillion, respectively, for these asset classes in the developed world.

"In this study, we extrapolate established historical patterns of growth in emerging and developed capital markets to assist in projecting their absolute and relative dimension and composition of market value by the year 2030. We find a strong relationship between the historical expansion of developed nation aggregate equity and corporate bond market value relative to GDP and gains in economic productivity. Thus, we used long-term projections of per capita GDP to make forecasts for both emerging and developed market equity and fixed income issuance over the 17 years to 2030," explains Alexander Redman, Global Emerging Markets Equity Strategist, Investment Banking at Credit Suisse in London.

Credit Suisse forecasts Saudi Arabia to emerge as the seventh largest emerging capital market by the year 2030 (with the equity market growing to be the sixth largest emerging market from the current tenth position).

According to Credit Suisse estimates, Saudi Arabia would account for the second largest share of emerging ECM deal fees ($5.5 billion) over the next 17 years. As a market with high retail ownership and a strong equity culture among high net worth individuals, secondary activity in equities should also prove to be a significant source of revenue, with average daily traded value expected to grow from $1.8 billion currently to $16.4 billion by 2030E.

The high forecast growth rate observed for Saudi Arabia would be consistent with a potential liberalization of the country's markets, should the Saudi Capital Markets Authority proceed with a reform package opening its bourse to direct foreign participation, thus creating significant additional external demand for Saudi assets.

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Source: CPI Financial

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