Morgan Stanley
  • Research
  • May 4, 2018

Asian Financial Markets Prepare to Take Flight

Rising wealth, advancing technology and government reforms are leading to rapid development of financial markets in Asia—with widespread implications.

While Asia may be a global leader in manufacturing and trade, the region’s financial markets are perhaps the least integrated and developed of the world's major economic regions. Now, that may be on the cusp of change.

This phase of rapid development could place Asia’s financial markets centre stage over the next decade and beyond.

Deep intra-Asia trade and investment linkages, rising wealth, government reforms and advancing technology platforms - among other factors - could drive a phase of rapid financial market development and integration throughout the region.

“The implications of success are profound,” said Jonathan Garner, Chief Asia and Emerging Market Equity Strategist for Morgan Stanley Research. “In our base case, Asia could dominate growth in global equity market capitalisation over the next 10 years. We may also see a rapid deepening of intra-regional bank lending, FX, rates and credit markets.”


Asian markets and institutional savings vehicles have long been underdeveloped relative to the region’s economic output. The gap between Asia's share of global GDP and share of global financial assets, excluding Japan, actually increased between 2005 and 2015. “If this gap closed, all else being equal, it would represent the equivalent of $19 trillion in additional financial market development in today's dollars,” said Garner.

Source: National central banks and statistical offices, Thomson Reuters, Allizanz Economic Research, Morgan Stanley Research

Intra-regional bank lending and portfolio capital flows (both debt and equity) in Asia substantially lag the size and shares of GDP seen in North America and Europe. In fact, more capital currently flows between other regions and Asia, both inbound and outbound, than flows within Asia.

Asia’s long-term savings markets, including pension systems, insurance and mutual funds are also underdeveloped. In 2015, Asia (including Japan) accounted for 33% of nominal global GDP, versus 26% for North America, but just 13% of global mutual fund assets versus a 50% share for North America.


Asia Lags Behind Its Economic Weight on Mutual Fund,
Pension and Insurance Market Development

Source: OECD, Insurance Europe, U.S. Treasury, Statista, CIRC, HK IA, TLAA, MAS, BNM, KLAA, ICP, IRDAI, TII, ICI Factbook, IMF, PWC 'Sovereign Investors 2020: A Growing Force', Morgan Stanley Research, Data as of 2015

But the tide may be turning. Four key drivers—rising income and wealth, deepening intra-Asia trade and foreign direct investment, financial sector reform and technology— are set to accelerate regional financial markets development. In addition, China and Japan both have strategies to drive the process forward: the One Belt One Road and exchange controls reform in China’s case; and the Tokyo Metropolitan government’s active promotion of Tokyo as a global financial centre in Japan’s case.

Another key indicator of the potential for financial markets growth: the increasing degree of personal savings concentrated in bank deposits, which account for 44% of household assets in Asia. Contrast that with Europe and North America where bank deposits represent 30% and 14% of household wealth, respectively.


The report also argues that Asia’s total equity market capitalisation could double over the next decade to $56 trillion, overtaking North America as the largest equity market region and accounting for more than half of the growth in world equity market capitalisation.

“China and Hong Kong are likely to be the largest source of growth for Asian equities over the next decade,” noted Equity Strategist Daniel Blake. “IPO and secondary issuance in these markets have already been larger than the U.S. each year since 2014.”

Additionally, Asia ex Japan government bond markets could expand from $4 trillion (U.S.) to $10 trillion over the same period, becoming as large as the JGB market. Meanwhile, the team expects the top 5 insurance markets in Asia to grow at 12% per annum.

The upshot of increasing local institutional sources of funding is likely to be reduced volatility and better multiples. Asian equities, excluding Japan, currently have a 5% higher return on equity in aggregate than global equities, yet stocks in the region have long traded at a valuation discount of around 20%. The growth of funds from local sources has the potential to lower this discount substantially over the next decade.


Asia's Equity Markets Have Tended to Be
More Volatile Than Developed Markets

Source: MSCI, Datastream (annualized 52-week rolling volatility based on price index in USD), Morgan Stanley Research

Local debt markets are also coming into their own; issuance in Asian corporate bonds has quadrupled since 2011, with the lion's share of demand for these bonds coming from local investors.


While the acceleration of Asian financial market development has implications across equity and debt markets, some financial services companies are in a good position to benefit. “The biggest winners are likely to be Asian and global financial sector firms with intra-Asia regional capabilities and a focus on securities markets, pensions, insurance, asset management, and cross-border banking,” said Anil Agarwal, head of Asian financial research.

Investors should not underestimate local banks’ ability to gain share as markets develop. “In most of the markets, foreign bank share has almost halved over the last 10 years, and this decline is likely to continue given local banks' strength in domestic funding,” Agarwal said.

Meanwhile, local banks are developing expertise in non-traditional bank products, such as credit cards, derivatives and foreign exchange, and are competing with foreign banks not just in their own backyards but, increasingly, throughout Asia.

All told, this phase of rapid development and integration could increase Asia’s economic resilience during global economic downturns - and may likely place Asia’s financial markets centre stage over the next decade and beyond.


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