McKinsey warns of threats to US financial leadership

Dari the Financial Times .
McKinsey warns of threats to US financial leadership
By Gillian Tett in London

Published: January 16 2008 02:00 | Last updated: January 16 2008 02:00

The US looks poised to lose its mantle as the world’s dominant financial market because of a rapid rise in the depth and maturity of markets in Europe, a study suggests.
The change may have occurred already, not least because US markets are beset by credit woes, according to research by McKinsey Global Institute, a think-tank affiliated to the consultancy.”We think the differential growth rates are so significant that it is quite likely Europe has overtaken the US,” said Diana Farrell, author of the report.

“They are now neck and neck, which means exchange rates are very important. It is a real change.”

A power shift is also under way in Asia as the Chinese market continues to boom while markets such as Japan stagnate.

McKinsey suggests China’s booming trade surplus has put it into the position of being the world’s largest net exporter of capital, topping Japan, Germany and the oil exporters for the first time.

The findings are likely to attract attention from bankers and policymakers since they come amid an intensifying debate about the changing pattern of financial power – an issue likely to be centre stage at the meeting of the World Economic Forum in Davos next week.

In previous decades, most US policymakers and bankers assumed their domestic markets were the largest and most sophisticated in the world, and sought to export their model of financial capitalism to other parts of the globe.

But the credit crisis has dented confidence in the health of America’s financial institutions and its model of finance.

Meanwhile, since the launch of the single currency in 1999, European markets have been steadily growing in liquidity and size.

And other parts of the world, such as Asia and the Gulf, are enjoying rapidly growing financial clout due to their large surpluses – a shift exemplified by the recent decision of Asian and Gulf Sovereign Wealth Funds to take large stakes in big US banks such as Citigroup.

The study by McKinsey, which provides one of the most comprehensive independent snapshots of financial flows, covers the trends in 2006.

But analysts say their initial research following the subprime shock suggests the credit turmoil has intensified these trends in 2007 in terms of the global pecking order.

In 2006, McKinsey calculates that America’s markets had some $56,100bn of assets. Europe, including the UK, had $53,200bn of assets, a sharp increase on recent years.

On recent trajectories, this implies that Europe overtook the US in 2007.

“The main message that emerged about financial deepening and what is happening outside the US in 2006 continued in 2007,” Ms Farrell said.

The UK accounted for some $10,000bn of assets, according to McKinsey, while the eurozone accounted for $37,600bn.

Switzerland, Sweden, Iceland, Denmark and Norway accounted for a combined $5,600bn.


Emerging markets must correct imbalances

Dari Financial Times.

Insight: Emerging markets must correct imbalances

By Francisco Blanch

Published: January 9 2008 16:24 | Last updated: January 9 2008 16:24

Recent US interest rate cuts have helped create a liquidity boom in emerging markets (EM), fuelling demand for raw materials and boosting stock markets. In turn, robust demand and a global oil supply contraction in the third quarter of 2007 recently pushed crude oil briefly above $100 a barrel. Meanwhile, the US dollar is close to record lows, both against the euro and on a broad basis. More interestingly, the long-term correlation between oil and the dollar has moved from a historical average of -1 per cent to -80 per cent of late.How are the spike in oil prices and the slide in the dollar related?Ultimately, they are linked to one common theme: the ambition of EM countries to support exceptional domestic economic growth by using non-market based mechanisms. Since China became a WTO member at the start of the decade, first a pegged and then a semi-pegged currency regime has kept Chinese labour extremely competitive, fuelling export-oriented domestic growth for years. A similar development has taken place in other EM countries. Continue reading