LONDON (Reuters) - Slowing economic growth, increasing consumer debt and soft real estate markets could mean the party is over for the global financial services sector after stellar returns in 2006, a new report said on Thursday.
Financial services consultancy Mercer Oliver Wyman's 2007 report, published at the Davos World Economic Forum, on the state of the world's financial services industry found that the financial services sector hit a record $10.7 trillion in market value in 2006.
This produced returns of 26 percent for investors, which was more that the 22 percent received by investors in non-financial sector companies.
The growth was driven by a strong performance from mature markets and even faster growth from emerging markets.
But financial services sector chief executives surveyed by Mercer Oliver Wyman expressed concern about the outlook, pointing to high consumer debt levels in mature markets which would create challenges for many businesses.
CEOs expected lower merger and acquisition activity in 2007, with the exception of cross-border transactions.
"Only one in four CEOs intend to engage in a major merger or acquisition, (down from one in three last year) and only 34 percent of CEOs cited smaller acquisitions as a priority (down from 60 percent last year.)"
The report highlighted a big increase in the traditionally limited involvement of private equity in financial services.
"Private equity firms have invested an estimated $70 billion in financial services since 2000 and in the past two years have seen four times the level of investment activity of the previous five years combined," it said.
Private equity firms to date have focused on specialty financial services providers, subprime lending, credit insurance and reinsurance.
But Mercer Oliver Wyman said the growing presence of private equity with $2 trillion of capital to invest would press financial services firms to "think like capital" in considering their own development.
Emerging markets played a big part in financial services sector growth, now representing 21 percent of the market value of the world's publicly-quoted financial institutions.
"At current growth rates, emerging markets companies will comprise more than 40 percent of the growth in total market value over the next five years."
But Mercer Oliver Wyman sounded a note of caution on sustainability of the current trend.
"Amid increasingly high market expectations, market values have risen more than twice as quickly as earnings growth over the past five years."
The winners in Mercer Oliver Wyman's annual rankings of financial services firms in terms of shareholder returns were mostly European and North American companies, with businesses spanning both retail and corporate/institutional clients.
Companies with market capitalization of more than $50 billion lost out to smaller players.
"Super-large cap firms appear to have suffered from a size penalty over the last five years, especially in Europe, as investors awarded greater market value increases to mid and large cap companies."
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