Today Europe is where the United States was 10 years ago— poised on the brink of explosive growth in collective investments. Within the next 25 years, 113m Europeans, nearly one-third of the population, will be pensioners, most covered only by government-financed programmes. The well-publicised inadequacies of pay-as-you-go national schemes are driving many to invest in capital markets. Tapping the higher returns these markets can produce is the single best hope for meeting the retirement challenge while avoiding massive tax hikes or benefit cuts.
Global assets from pensions, collective funds and insurance companies have grown at a compound annual growth rate of 13.82% from $10trn in 1990 to $36trn today. The number is predicted to hit $60trn by 2004 even without pension reforms. These trillions are fuelling a long-running transition in the structure of world finance away from traditional banking. Proof is in the on-going derivatives revolution and dramatic growth in the pan-European bond markets, including high-yield, corporate and asset-backed securities.
The transition increased momentum in 1999 when, for the first time ever, the world’s total stock market capitalisation went past 100% of total world economic output. The global stock market ‘cap’ reached $31.7trn on the MSCI index versus the IMF’s estimate of $30trn in global output of good and services. Total global securities market capitalisation, including bond markets, is nearly 175% of world output. Conservative estimates put the cap over 200% by 2005.
The pace and scope of capital market growth far surpasses that of all banking activity everywhere. In fact, the most dynamic elements of the banking industry itself are those areas now being securitised: syndicated lending, mortgages, credit card debt and other accounts receivable. Capital markets and the securitisation of finance will continue to gain impetus from technology.
Robust capital markets have vital competitive advantages. They can raise start-up finance much more quickly and flexibly than banks. They split the ‘atom’ of risk and distribute ‘particle’ risk to entities most willing to hold it. Capital markets also provide the best ‘exit strategy’ for venture capitalists that pioneer growth by taking risks on new ideas.
Europe’s latent potential is evident in the explosive growth of its bond market. More than $130bn worth of euro-denominated bonds were issued in the Euro-zone in 1999, up from $52bn in 1998. And European stock exchanges are scrambling to merge, go public and otherwise prepare to compete for promising new and vast investment flows.
Collective fund investing has exploded in Italy and Spain. About 17% of Norwegians, 26% of the British, and 15% of the French now own stock. Though far less than the more than 40% (70m) of adult Americans who invest in the markets, the direction of direction of European collective investment is clear.
European pension assets are expected to grow from $2.5trn today to $4trn by 2005.
This pace would accelerate substantially if the EC moves to foster pre-funded pension savings reforms.
As the multiple retail aspects of the European mutual fund marketplace continue to unfold, distributors will increasingly use standard web-based tools to support clients. These will require a core processing engine to support the highest level of shareholder account servicing and global operational efficiencies. Technology leaders will continue to develop the Web-based services and scalable global platform that will help secure Luxembourg’s future as the domicile of choice for large-scale distribution of retail and institutional investment fund products to world markets.