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Sci-fi, by Goldman Sachs | Financial Times


John Maynard Keynes’ third- or maybe fourth-most quoted quote, the one about how everyone’s dead in the long run, tends to be cut off too early. It can be found on page 80 of A Tract On Monetary Reform, in the middle of a discussion about how the quantity theory of money is misapplied.

To very crudely paraphrase, Keynes says changes in the money supply don’t have a predictable effect on prices because people don’t know or care what economists say will happen. The theory of how money flows and purchasing power interact may be right, eventually, but to trust it is looking through the telescope the wrong way:

[T]his long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.

So anyway, Goldman Sachs has a note out this morning that forecasts how big the world’s capital markets will be by 2075. It builds on work published in December that did the same for the global economy and concluded: “By 2075, China, the US, and India are likely to remain the three largest economies and, with the right policies and institutions, seven of the world’s top ten economies are projected to be EMs.”

To crudely paraphrase once again, Goldman says market cap-to-GDP ratios tend to increase with GDP per capita. And though real GDP growth slowed for both developed and emerging economies in the past 10-15 years, income convergence has continued in spite of a GFC and a pandemic.

The persistency of EM-DM income convergence means the distribution of global income will shift towards a “growing group of ‘middle-income’ economies”, it says. That means the US is knocked off its perch by China in 2035 and is overtaken by India in 2075, etc:

Today’s update concentrates on future equity market capitalisation. It’s a fairly simple exercise where the long-term forecasts are run through a market cap-to-GDP table (because equity market value as a percentage of GDP tends to be higher among richer countries) and GDP per-capita estimates (where there’s more of a rising-tide-lifts-all-boats sort of relationship).

As income levels rise, EM equity asset growth will outpace GDP growth, Goldman says. A national wealth effect means “the equitisation of corporate assets, the deepening of capital markets, and the disintermediation that takes place as financial development proceeds.”

Its conclusion: watch India.

Our projections imply that EMs’ share of global equity market capitalisation will rise from around 27% currently to 35% in 2030, 47% in 2050, and 55% in 2075. We expect India to record the largest increase in global market cap share — from a little under 3% in 2022 to 8% in 2050, and 12% in 2075 — reflecting a favourable demographic outlook and rapid GDP per capita growth. We project that China’s share will rise from 10% to 15% by 2050 but, reflecting a demographic-led slowdown in potential growth, that it will then decline to around 13% by 2075. The increasing importance of equity markets outside the US implies that its share is projected to fall from 42% in 2022 to 27% in 2050, and 22% in 2075.

But also, keep buying all equities everywhere, says Goldman. They’re all good, in the long run:

Do our projections that EMs’ share of global equity market cap will rise at the expense of DMs imply that long-term investors should overweight EM vs DM equities? Not necessarily.

To the extent that the growth of EM capital markets comes from the equitisation of corporate assets — and we expect this to be the major driver — this does not have a clear implication for the performance of equities themselves.

That said, we expect EM equities to outperform DM equities in the longer run for other reasons: namely, the combination of stronger long-run earnings growth and multiple expansion, as risk premia fall.

What could possibly go wrong? Here are the risk factors:

Of the many risks to our economic projections, we identified rising protectionism and climate change as the most important long-term risks. Of these, we view the first as the more important risk to the growth of capital markets — specifically, the risk that populist nationalism leads to increased protectionism and a reversal of globalisation.

The successful development of open capital markets is particularly exposed to this risk because it relies on the ability and willingness of investors to commit capital to foreign jurisdictions. To date, the rise of populist nationalism has led to a slowdown rather than a reversal of globalisation, in our assessment. However, there are already examples of populist nationalism bringing about a clear reduction in openness to trade and capital flows — such as the impact of Brexit on the UK — and the risk of a broader reversal of globalisation is clear.

The development of deep equity markets also requires a commitment from domestic policymakers to follow a mix of capital-market-friendly policies that encourage innovation, transparency, listing, protection of private property rights, etc. It is impossible to incorporate each of these elements into an analytical framework satisfactorily, which is why we have focused on the broader relationship that exists between GDP per capita and equity market capitalisation ratios. In modelling equity capital market growth in this way, we implicitly assume that the conditions required for economic growth are also the conditions required for capital market development. But this won’t always be the case, which presents risks (especially to our EMC projections for any individual country).

Finally, the development and dissemination of Generative Artificial Intelligence is another important risk to our projections. Because it is likely to raise global productivity and GDP per capita levels, we view it as an upside risk to the development of global capital markets. However, as the effects appear likely to be larger in DM than EM economies, this implies that it poses a downside risk to the projected increase in EMs’ share of global equity market capitalisation.

Goldman’s economists don’t disagree with Keynes about the ultimate value of this exercise, pretty much, though the latter is a better writer than the former:

Making economic projections over a 50-year horizon for 104 countries inevitably involves a considerable degree of risk and uncertainty. Indeed, given the difficulties in forecasting even one or two years ahead, some readers may be sceptical of the value of forecasts that extend so far into the future. However, one advantage of making long-term projections is that cyclical risk — an important source of short-term forecasting error — tends to mean-revert over time, leaving GDP mostly determined by slower-moving trends in population, capital, and technology.

Readers should also note that other long-term predictions are available. For example, 2075 is the year when an earthquake destroys Earth’s fusion engines and puts our frozen planet and its subterranean population into a collision course with Jupiter, according to 2019 film The Wandering Earth. How these events affect global equity market capitalisations is not a theme the movie investigates in comparable detail.

Rayna Prime

Rayna Prime

Rayna Prime Editor