The shape of the global financial system today appears quite similar to what it was prior to the great financial crash of 2008. The proportion of debt assets in the total stock of financial assets has only grown over the past few years even as the share of equity assets have seen a marginal decline since the mid-2000s, according to recent data on global wealth published by Deutsche Bank AG.
As the first chart shows, the one big change since the mid-2000s has been the rise in the share of public debt securities held by financial institutions. As governments across the world have stepped up spending to boost growth, they have been increasingly tapping the debt markets to finance deficits. The share of public debt securities in the global stock of financial assets has risen nearly 7 percentage points since 2005 to 20% in 2014. The share of equity assets (as valued at 2014 market prices) has fallen by nearly 2 percentage points to 23.5% over the same period. The share of exchange-traded derivatives in total traded derivatives has fallen 6 percentage points since 2005 to 10% in 2014, which indicates a disturbing rise in the dominance of the relatively opaque over-the-counter derivatives market.
With net assets worth $38 trillion, pension funds are the biggest financial institutions in the world, followed by mutual funds which have aggregate assets of $31 trillion. Insurance funds occupy the third spot, with aggregate assets worth $29 trillion. Sovereign wealth funds are a distant fourth, with aggregate assets worth $7.1 trillion.
The Indian mutual fund industry’s assets may be close to record highs but compared to other economies, the domestic mutual fund industry is puny in size. Assets of Indian mutual funds account for only 0.4% of global mutual fund assets. In contrast, mutual fund assets in Brazil, whose economy is only a little larger than India’s, account for 3.4% of global mutual fund assets. Chinese mutual funds account for 2% of global mutual fund assets despite under-developed financial markets in that country. US mutual funds account for nearly half of all global assets.
Sovereign wealth funds have been important participants in financial markets over the past decade but as the charts below show, the fortunes of most sovereign wealth funds are tied to oil. For instance, the biggest sovereign wealth fund, Norway’s Government Pension Fund Global (formerly the Government Petroleum Fund) derives its funding from profits generated by the country’s petroleum sector. Most other large sovereign wealth funds are also financed by oil profits.
If oil prices remain low for quite some time to come, it will hit these funds hard. The only exception to oil-based sovereign wealth funds are the Chinese funds, which have grown in size and influence over the past few years.
