KUALA LUMPUR (May 16): The domestic assets under management (AUM) in Malaysia is expected to rise 70% to US$729 billion by 2028, from US$435 billion in 2018, according to Morgan Stanley.

"While the benefits for equities are potentially massive, we think more domestic funds will help deepen onshore capital markets as well as reduce volatility to risk-free rates by compensating during periods of foreign capital outflows," said Morgan Stanley a report titled 'ASEAN Equity Strategy: The Rise of Domestic AUMs'.

For equities, Morgan Stanley is expecting the average daily traded value (ADTV) to surge to US$2.8 billion by 2028, despite falling trade velocity.

This is helped by the increase in equities allocation to US$685 billion, which Morgan Stanley says is a boon for the markets and will bring much needed liquidity, and possibly to even as high as US$1 trillion in its bull case; typically higher trading velocity of local monies; as well as US$1.9 trillion more market capitalisation.

Over time, Morgan Stanley pointed out that these countries will also 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 that Indonesia and the Philippines, which doubled its overseas investment limit for pensions to 15% in 2017, will in time also likely follow albeit slowly.

Meanwhile, it said the AUM for the Asean4 — Indonesia, Malaysia, Philippines, and Thailand — is expected to rise to US$2.1 trillion by 2028, or up some 91%, from US$1.1 trillion in 2018.

In the report, Morgan Stanley highlighted that the institutional financial savings are rapidly accumulating in these four countries.

"Since 2010, domestic AUM are up 85% in US dollar terms — a run rate of US$55 billion additions a year — and if we adjust for bouts of currency weakness the constant currency growth is closer to 130%," it said.

Morgan Stanley noted that the drivers for the rising AUM are obvious with higher nominal gross domestic product (GDP), increased penetration of pensions and more participation in financial savings from a growing middle class; and is likely to stay 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.

"But, it's interesting to note that in early 2019 GSIS, the Philippines' largest pension fund, cancelled plans to allocate up to US$800 million to two overseas asset managers," it said.