World financial power brokers - The McKinsey Quarterly - oil financial power brokers - Financial Services

As a result of the growing importance of four rising capital markets players, the world’s financial structure is shifting. Asia’s central banks and the oil-rich countries have raised global liquidity, thereby lowering the cost of capital in many markets. Hedge funds and private-equity firms have made markets more efficient and influenced corporate governance, respectively. The roles of these new power brokers have created a sense of unease. But in our view, the benefits of greater liquidity, innovation, and diversification outweigh the dangers.

Exhibit 1: The new power brokers include Asian central banks, oil-rich countries, hedge funds, and private-equity firms.
Exhibit 2: Oil-exporting countries have become the world’s largest source of global capital flows, surpassing Asia.
Exhibit 3: Gulf Cooperation Council states are the largest oil exporters.
Exhibit 4: Even if oil prices declined to $30 per barrel, petrodollar foreign assets would grow at a robust average annual rate.
Exhibit 5: Forgone returns represent a significant opportunity cost for Asia.
Exhibit 6: Even if China’s current-account surplus declined dramatically over the next five years and Japan’s remained the same, Asian reserve assets would still grow dramatically.
Exhibit 7: Even if the growth of hedge funds slows significantly, their assets could still reach $3.5 trillion by 2012.
Exhibit 8: Hedge funds account for a significant share of trading volume.
Exhibit 9: The hedge funds’ strategies have become more diverse, reducing herd behavior.
Exhibit 10: Private-equity firms are major players in mergers and acquisitions.
Exhibit 11: A higher level of private-equity defaults would have only a limited impact on financial markets.
Exhibit 12: Despite problems with some recent buyouts, global private equity will likely continue to grow, changing financial markets in fundamental ways.