Global growth is shifting East. The UN’s World Economic Situation and Prospects 2011 report revealed the strikingly different outlooks for developing countries in the East, where growth continues to be strong, and for developed economies in the West, where growth remains stubbornly anaemic.

These diverging economic expectations are likely to have profound implications for the development of equity capital markets. The shifting patterns of domestic growth, consumer demand and investment flows mean that an increasing number of the companies with a global outlook looking to tap stock exchanges for capital will in future come from the emerging economies.

Where the companies from emerging markets once eschewed their often small and illiquid local exchanges, aspiring rather to list in the global financial centres of London or New York, now local centres are emerging as sophisticated financial centres in their own right and competing successfully for more of their domestic listing business.

What does the rise of emerging market stock exchanges mean for the stock exchanges and service providers in the historically dominant financial centres of the developed markets? And what are the implications for companies from both emerging and developed markets that are deciding on which exchange to list?

In August 2011 the Economist Intelligence Unit (EIU) conducted a survey on behalf of PwC to ask almost 400 senior managers at companies from across the globe for their views on which factors are shaping the development of equity capital markets. The report that follows presents the highlights of the survey findings, along with additional insights from industry experts and commentators.

Key findings from the research include the following:

The economic growth and increasing financial sophistication of emerging markets means that competition between stock exchanges is intensifying.

Almost three-quarters (74%) of respondents said that emerging market companies will look to another emerging market for a listing. More than half of respondents believed that developed market companies, by contrast, will still prefer to be listed in another developed market.

Shanghai emerges as potentially the most attractive venue for foreign listings in 2025. More than half of respondents (55%) believe that Shanghai (which does not yet allow foreign listings or investments) will be the exchange most companies will consider by 2025.

With competition from emerging markets set to increase, developed market exchanges face a challenge to their dominance. Almost four in ten (39%) respondents believe New York will continue to play a global role for (IPOs) in 2025, and 27% believe that London will. Also, those incumbent exchanges that underestimate competition from emerging exchanges will lose market share as a consequence, according to three-quarters of respondents.

The focus of IPO activity is shifting East.

Companies from the East are expected to dominate the IPO pipeline by 2025. China is predicted by around 80% of respondents to be the home of most new issuers by 2025 and also to raise the most capital by 2025. India comes second in terms of issuers, but third in terms of capital.

Of stock exchanges in the BRIC countries, Brazil and Russia lag China and India. While 38% of respondents think that Indian exchanges will be an important listing destination for foreign companies by 2025, just 11% of respondents believe that Russia will increase in popularity as a listing destination. Brazil, with 30% of the vote, lags respondents’ belief in India and especially China.

However, there are factors that could derail the shift to emerging markets.

Developed markets still far outstrip their emerging rivals in terms of size. The legal and regulatory environment, followed by political
uncertainty, is seen as the factor most likely to derail the shift to emerging market exchanges. An uncertain regulatory environment is seen as the biggest concern for companies considering listing on an emerging market stock exchange, with more than half (56%) citing this as their major concern. Volatile political conditions and government intervention in markets were cited as major concerns by 33% and 27% of respondents,
respectively.

The factors looked for by companies planning to list give incumbent exchanges an edge. Liquidity is by far the most important characteristic when choosing a stock market, followed by a sizeable investor base and good analyst coverage, initial listing and ongoing legal requirements, and infrastructure. Because of this, although 76% of respondents said that developed market exchanges will have to work harder to attract companies from emerging markets to list, almost one in five also believes that developed market stock exchanges have clear advantages over emerging market exchanges, which are difficult to overcome.