Report: the size, depth & growth opportunity in UK capital markets
May 2018 • Unlocking capital markets • by Panagiotis Asimakopoulos
Capital markets in the UK are the largest in the EU and are roughly twice as deep relative to the size of the economy as in the rest of the EU. But there is plenty of scope for growth and no room for complacency: UK capital markets are only half as developed as in the US, and over the past decade this gap has widened.
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Brexit has exposed a stark divide in capital markets in Europe between the large highly developed markets in the UK, and the much less developed markets in the rest of the EU. Building on our recent report on the depth of capital markets across the EU, we thought it would be useful to zoom in on the UK and put some hard numbers on the size of depth of different sectors of the capital markets to help frame what Brexit means when it comes to the future relationship between the UK and EU.
The report analyses 24 sectors of the capital markets in the – from pensions and asset management to corporate bond markets and venture capital – over the past decade in Europe and at an individual country level, with a particular focus on the UK.
It’s the third year that we have run this analysis and it makes for sobering reading: while UK capital markets are the most developed in Europe, they are on average smaller and less developed relative to GDP than they were a decade ago and the gap in depth between markets in the UK and the US has widened. At the same time, the gap in depth between UK markets and the rest of the EU has narrowed.
On the plus side, corporate bond markets have grown rapidly over the past decade; the shift from bank lending to market-led financing has continued; and in the past few years there have been encouraging signs of a return to growth in equity markets. The report also highlights and quantifies the enormous growth potential of capital markets in the UK
Here is a 10-point summary of the main highlights of the report:
1. Capital markets in the UK have still not recovered from the financial crisis: capital markets are on average less developed relative to GDP than they were a decade ago, despite some encouraging growth in recent years. Over a quarter of the sectors in our sample have shrunk in absolute terms over the past decade and more than half of sectors have shrunk relative to GDP.
2. Capital markets in the UK are only around half as deep as in the US, and this transatlantic gap in depth has widened over the past decade in more than half of the sectors in our sample. While capital markets in the US have grown relative to GDP over the past decade, capital markets in the UK have shrunk by nearly a fifth.
3. Brexit has highlighted the stark gap between the depth of capital markets in the UK and the rest of the EU. This underlines the urgency of developing deeper capital markets in the EU27. On average, capital markets in the EU27 are only half as deep relative to GDP as in the UK. This gap in depth has widened over the past decade in more than half of the sectors in our sample.
4. The UK has the deepest and most developed capital markets in the EU. However, the gap between the UK and other EU economies such as the Netherlands and Sweden has narrowed over the past decade. UK capital markets are on average nearly twice as deep relative to GDP as in the rest of the EU but are half as developed as in the US.
5. The value of bank lending to companies in the UK has fallen by a third in real terms from its peak, whereas the flow of new bank lending has doubled in absolute terms since 2012 compared to a decline of nearly 10% in the Eurozone over the same period. The overall value of available funding from banks and capital markets as a percentage of GDP has fallen slightly over the past decade in the UK and EU27 (while it has risen in the US).
6. Pools of long-term capital – the starting point for healthy capital markets – are much more developed in the UK than in the rest of the EU. Pensions assets in the UK are more than three times larger relative to GDP than in the EU27 and insurance assets around a third bigger. UK pensions assets have increased by half in absolute size and by a quarter relative to GDP over the past decade, but are still only two thirds as developed as in the US.
7. There has been a clear shift over the past decade in Europe in corporate funding from bank lending to bond markets. The UK has led the way in the EU: high-yield bond issuance has more than tripled in the UK over the past decade and investment grade issuance has more than doubled.
8. While equity markets in the UK are broadly deeper and more developed than in the EU27 and the US, some sectors are smaller than they were in 2006. For example, the IPO market has shrunk by roughly one tenth relative to GDP and the value of the UK stockmarket relative to GDP has dropped by 4%. The value of IPOs by smaller companies in the UK has fallen by around two thirds in absolute terms and venture capital investment has halved relative to GDP.
9. The potential for growth is huge. We estimate that if capital markets in the UK were to close the gap in depth with the US it would unlock nearly £900 billion in long-term capital that could be put to work for the UK economy and around £90bn a year in additional capital markets funding for companies.
10. Meanwhile, if capital markets in the EU27 closed half the gap in depth with the UK, it would unlock around €6 trillion in long-term capital and around €100 billion per year in additional funding for European companies.
The report analyses the depth of capital markets across the following 24 different metrics in all 28 EU member states:
* Pools of capital: pensions assets, insurance assets, household financial assets (excluding pensions, insurance and cash deposits)
* Market value: stockmarket, bond market, corporate bond market, securitisation market, bank lending relative to corporate bonds
* Assets under management: investment funds by domicile, assets under management by country
* Debt issuance: corporate bonds, investment grade bonds, high-yield bonds, leveraged loans, securitisation
* Equity issuance: all equity issues, initial public offerings, secondary equity issues
* Corporate activity: all mergers and acquisitions, domestic M&A, private equity activity, venture capital activity, private equity fundraising.
* Trading: equity trading volumes
In each sector we measured the value of activity as a percentage of GDP in each country on a three year rolling basis from 2004 to 2016 to iron out the annual volatility in capital markets. To enable a comparison in depth between sectors we rebased these percentages in each sector to the EU average, with 100 representing the average depth across the EU in the three years to the end of 2014. The overall ranking is the average of these scores across all 24 metrics.
For example, the value of EU stockmarkets in the three years to 2014 was 67% of combined EU GDP. We rebased this 67% to 100, meaning that in any given period a country with a score of 50 has a stockmarket that is half as deep relative to GDP as the EU average in the three years to 2014, and one with a score of 200 is twice as deep. This report does not capture the growth in many sectors of EU capital markets in 2017: that growth will be reflected in a report later this year.
Thank you to Dealogic for providing much of the data in this report and our members for their invaluable support for our work in making the case for bigger and better capital markets.
About New Financial:
New Financial is capital markets think tank launched in 2014. We’re having a growing impact among senior industry leaders and policymakers across Europe on making the case the case for bigger and better capital markets. In the wake of the financial crisis there is a huge opportunity for the industry to embrace change and to work with its customers and policymakers to rethink capital markets.
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