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SEPTEMBER 2009

m c k i n s e y

g l o b a l

i n s t i t u t e

Global capital markets: Entering a new era

A new report by the McKinsey Global Institute highlights the impact of the global financial crisis on global capital flows.
Susan Lund and Charles Roxburgh

The global financial crisis and worldwide recession abruptly halted nearly three decades of expansion for international capital markets. From 1980 through 2007, the worlds financial assetsincluding equities, private and public debt, and bank depositsnearly quadrupled in size relative to global GDP. Global capital flows similarly surged. But the upheaval in financial markets in late 2008 broke this trend. The total value of the worlds financial assets fell by $16 trillion last year, to $178 trillion, the largest setback on record. One of the most striking consequences of the financial crisis was a steep dropoff in cross-border capital flows, which include foreign direct investment (FDI), purchases and sales of foreign equities and debt securities, and cross-border lending and deposits. These capital flows fell 82 percent, to just $1.9 trillion, from $10.5 trillion in Web 2009 2007. (A sharp drop in cross-border lending was the biggest reason capital flows dried up.) MGI trend markets The capital appears to have continued in the first quarter of 2009, with global capital Exhibit 1 of 1 flows falling to an estimated $1.5 trillion on an annualized basis. Glance: Global capital ows have reversed, falling by 82 percent (to $1.9 trillion). Exhibit title: A deep decline

Exhibit

Total cross-border capital inows,1 $ trillion (2008 exchange rates) Compound annual growth rate 198090 = 9% 11 10 9 8 7 6 5 4 3 2 1 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 20072 4.5 3.2 3.7 4.8 4.0 4.5 3.7 3.6 6.6 6.5 14.3 7.5 11.9 15.9 3.2 % of global GDP
1Capital

A deep decline

Foreign direct investment (FDI)

19902007 = 15%

Equity securities Debt securities Lending and deposits

10.5 2.1 0.8 2.6 82%

1.9 4.9 1.8 1.6 1.3 0.2 2008

inflows represent net purchases by foreigners of FDI, equity, and debt securities, as well as deposits and loans to local banks. 2Figures do not sum to total, because of rounding. Source: McKinsey Global Institute analysis

Related articles The crisisone year on: McKinsey Global Economic Conditions Survey results, September 2009 Long-term trends in the global capital markets Mapping the global capital markets

These are among the findings in the McKinsey Global Institute (MGI) report Global capital markets: Entering a new era, which presents the latest research on the evolution of the worlds financial markets. The report assesses the implications of the global financial crisis and economic downturn through the lens of financial assets, capital inflows and outflows, and cross-border investments since 1990 of more than 100 countries around the world. To read an executive summary or download the complete report, visit mckinsey.com/mgi.

Susan Lund is director of research at the McKinsey Global Institute, and Charles Roxburgh is a director in McKinseys London office. Copyright 2009 McKinsey & Company. All rights reserved.