Living in a world of too much capital: Bain
Global low interest rates distorting financial movements
By cai haoxiang
[email protected]
Published November 05, 2013
THE world will have to grapple with too much financial capital sloshing around in the next 10 years, according to management consultancy Bain & Company.
Investors and businesses need to factor lower interest rates into their calculations, watch out for asset bubbles, and conduct more due diligence, Bain said at a breakfast meeting with its Singapore clients yesterday.
More dry powder around will also mean the return of a wave of mergers and acquisitions (M&As). Even though cause and effect is not clear, strong businesses that enjoy above-average returns tend to pursue frequent, substantial deals, Bain said.
"We remain extraordinarily bullish about the investment environment right now, and think that from a corporate and private equity perspective there's still tremendous opportunities to put capital to work," said David Harding, who heads Bain's global M&A practice.
"But there's a paradox of unreasonable investor expectations. With a world awash in capital and interests rates going to stay low for an extended period of time, yet investors continue to ramp up their expectations . . . it's a very fine line to walk."
Bain joins others who have commented on the distortions caused by the global low interest rate environment that has persisted since the global financial crisis. At the end of last month, asset management giant BlackRock's CEO Laurence Fink said the US Federal Reserve should start to taper off its US$85 billion of bond purchases as it was contributing to "bubble-like markets", amid a run-up in equity prices and a narrowing of corporate bond spreads.
But even if the US stops expanding its balance sheet, monetary easing by other developed markets such as the UK and Japan, and capital generation by emerging markets like China, will ensure that the global pool of capital is not going to contract, said director of macro trends group Karen Harris.
Bain projects that total financial assets in the world will rise to US$900 trillion by 2020 from US$600 trillion in 2010. More than two-thirds of that growth will come from the US, Europe and China, which is generated by economic activity and affluent Chinese savers putting their money to work. The world economy will increase by only US$27 trillion to US$90 trillion in the same period, by contrast.
With so much supply of capital, interest rates - reflecting the cost of capital - will come down. Asset classes are also becoming more correlated with each other, making diversification to limit risks difficult.
"In this environment, investors' success will be determined less by how much money they command than by their ability to spot an investment's true value creation potential and act on it nimbly," Bain said.
Rather than settle for lower, more volatile short-term returns, companies and investors should lower their hurdle rate (minimum return expectations) and extend their time horizons, Bain said.
Two broad investment themes the consultancy highlighted are infrastructure projects and frontier technologies on the cusp of commercialisation, such as nanotechnology, artificial intelligence, genomics and robotics.
http://www.businesstimes.com.sg/premium/singapore/living-world-too-much-capital-bain-20131105
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