This article first appeared in The Edge Financial Daily on May 17, 2019

KUALA LUMPUR: Domestic assets under management (AUM) in Malaysia are expected to rise 70% to US$729 billion by 2028, from US$435 billion in 2018, amid rapidly accumulating institutional financial savings, according to Morgan Stanley.

The trend is expected not just for Malaysia, but also Indonesia, the Philippines and Thailand. Domestic AUM from the four countries are anticipated to rise 91% to a collective US$2.1 trillion by 2028, from US$1.1 trillion in 2018.

“Since 2010, domestic AUM have been up 85% in US dollar terms — a run rate of US$55 billion (RM229.35 billion) additions a year. And if we adjust for bouts of currency weakness, the constant currency growth is closer to 130%,” according to Morgan Stanley’s report entitled “Asean Equity Strategy: The Rise of Domestic AUMs”.

Morgan Stanley noted the drivers for the rising AUM are obvious, with a higher nominal gross domestic product, an increased penetration of pensions and more participation in financial savings from a growing middle class.

It added these drivers are likely intact for the foreseeable future, both underwriting acceleration in the additions run rate to US$110 billion a year.

“This doubles domestic AUM to US$2.1 trillion by 2028, while even our bear case shows AUM up 50% and our bull case a more exciting up 170%,” Morgan Stanley added.

Potentially a massive benefit for equities

Domestic funds, it believes, will help deepen onshore capital markets as well as reduce volatility to risk-free rates by compensating during periods of foreign capital outflows.

Anticipating a “potentially massive” benefit for equities, Morgan Stanley is expecting the average daily traded value to surge to US$2.8 billion by 2028, despite falling trade velocity.

This will be helped by three factors: an increase in allocation of equities to US$685 billion — and possibly to as high as US$1 trillion in its bull case — which Morgan Stanley said is a boon for markets, bringing much-needed liquidity; a typically higher trading velocity of local monies; and US$1.9 trillion more in market capitalisation.

Eventually, Morgan Stanley said Malaysia, Thailand, Indonesia and the Philippines will become bigger exporters of financial savings.

“Thailand’s mutual funds with US$33 billion in overseas investments and Malaysia’s pension funds with US$62 billion are leading this trend,” said Morgan Stanley, noting Indonesia and the Philippines, doubling its overseas investment limit for pensions to 15% in 2017, may follow as well, albeit slowly.

“But interestingly, in early 2019, the Philippines’ largest pension fund GSIS cancelled plans to allocate up to US$800 million to two overseas asset managers,” it noted.