London and New York are not about to lose their spots as the world's leading financial centers but they are being challenged by emerging market upstarts in a potentially lucrative area: the management of funds moving between developing economies.
With developed economies struggling and emerging markets thriving, more and more financial deals are being cut well away from the traditional centers.
Rising trade between emerging economies, cross-border mergers, acquisitions by Indian and Chinese companies and moves by developing world businesses to raise capital in each other's markets will spur growth of financial centers in the fastest growing economies, according to industry experts who addressed the Reuters Emerging Markets Summit in Sao Paulo last week.
For the bankers clustering in cities like Sao Paulo and Mumbai, the intra-emerging markets movement of funds represents an alluring chance to make money.
We see flows between Africa and India, India and China, India and Korea being much bigger, said Neeraj Swaroop, CEO of Standard Chartered's India business. Not just big companies but also small- and medium-sized companies are making outbound investments. For banks like Standard Chartered, these are immense opportunities to pursue.
Stephen Jennings, CEO of Renaissance Capital, a Moscow-based investment bank focused on developing economies, said he is already seeing a rapid integration of capital flows in emerging markets.
In our M&A practice, 80 percent of our deals don't have a Western face. And the same thing will happen with financial flows, he told the Reuters summit.
London cannot possibly retain its role as a primary capital markets center for emerging markets ... I think it will be displaced totally over the next two to three years, he said, adding that high taxes, intensifying regulation and unfavorable immigration policies all work against the City.
While other industry experts expect New York and London to remain dominant for years to come, examples of the world's changing investment flows abound.
Chinese investment is surging in Africa, Latin America and Southeast Asia. Russian and central Asian resources companies are lining up to list shares in Hong Kong. Jennings says UC Rusal's $2.2 billion IPO in Hong Kong in January was the tip of a massive iceberg.
Chinese banks are also making big loans across the developing world, such as $1 billion in financing South Africa's Standard Bank obtained from a consortium of Chinese lenders in 2009. And Brazilian companies will soon tap debt markets in South Africa and Russia, said Eduardo Centola, CEO of Standard Bank's Latin American operations.
There is interest in issuing bonds for Brazilian companies in rand, and there's a huge appetite for rand bonds in Africa, said Centola. We also find there is an appetite for Brazilian companies to issue in rubles.
Both New York and London have a long list of advantages over emerging market rivals, ranging from loose capital controls and the strong rule of law to sound infrastructure and high quality schools and universities.
Jim O'Neill, Goldman Sachs' head of global economic research and the man who coined the term BRICs, says it will take many years before the traditional financial powerhouses are overtaken by emerging market rivals.
For any of these emerging markets to truly be an international financial center, they have to do something about the basic ingredients, including the use of English and adopting very credible and acceptable rules of business law, he said. Without those two basic things, these countries have no chance.
Nevertheless, some of the new centers may soon dominate lucrative niches.
Singapore is challenging Switzerland for the world's wealth management business, Hong Kong -- which led the world in IPOs last year -- is becoming an equity hub for Asia's growing resources companies and Shanghai, not New York, is coordinating the financial resources driving China's private sector.
To Jennings, these are the seeds of a new model: one in which the savings of emerging markets no longer flow to the United States and Europe, but rather to the areas with the highest growth rates.
In the last 10 years, emerging markets savings have, through the dollar as the reserve currency, been intermediated through the West, he said. But that capital is much more efficiently deployed in emerging markets because returns are higher and in some cases risk is lower. So those connections, the new financial plumbing, are being built now.
(Editing by Kieran Murray)