Mckinsey: The growing opportunity for investment banks in emerging markets

The credit crunch that erupted in mid-2007 has already taken many new twists in the first half of 2008. But new McKinsey research shows that, amid the general uncertainty, the outlook for investment banking in emerging markets remains relatively bright.

Even in the worst case, emerging Asia and Europe, the Middle East, and Latin America will probably show absolute revenue growth over the next three years. Under all likely outcomes, the proportion of global revenues from emerging markets will jump sharply. Collectively, indeed, revenues from investment-banking and capital market activities in these regions are projected to match those in North America by 2010; in 2006, before the credit crunch, they amounted to less than half.1 A case, perhaps, for referring to “emerged” rather than emerging markets in the future?

Exactly when capital market activity recovers around the world will depend on three critical uncertainties: the prospects for the US and global economies, the speed of recovery in credit markets, and the behavior of investors and regulators. But several factors already suggest that emerging markets will be big winners in the near future. First, their macroeconomic environment remains comparatively benign, even if talk of a complete “decoupling” of their economies from those of the United States and Western Europe was premature. Although, if trade flows with the West do suffer, regional demand for oil and commodities, growing intra- and interregional trade flows (especially within Asia and between it and the Middle East), and huge infrastructure-investment programs will continue to underpin growth. Second, a new breed of global corporate players, notably in countries such as China, India, and the United Arab Emirates (UAE), now demands the sort of sophisticated investment-banking services previously reserved for large Western multinationals. This new group thus represents an increasingly attractive fee pool.

On the supply side, the emerging world’s capital markets will continue to develop. In part, their growth reflects intraregional competition, seen in the rush to develop financial centers in the Middle East and in government-sponsored bond issuance programs. At the same time, global investment banks are redirecting their resources—both human and capital—toward emerging markets, which they see as a new source of revenues to compensate for leaner times at home.

In the event of a relatively benign outcome for global capital markets—a one-year setback, with growth resuming in 2009—we calculate that revenues from investment banking in emerging markets will increase by 16 percent a year from 2007 to 2010, when they will generate 28 percent of the global total (exhibit). In this “steady recovery” scenario, Asia will continue to represent the lion’s share (66 percent) of the emerging markets’ revenue stream of almost $120 billion.