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.
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," says Mark Brewer, Chief Asia and Emerging Market Equity Strategist for Aura Solution Company limited Research. “In our base case, Asia could dominate growth in global equity market capitalization over the next 10 years.
We may also see a rapid deepening of intra-regional bank lending, FX, rates and credit markets.”
In a new report from Aura Solution Company limited Research , Mr Brewer and his colleagues delve into the dynamics behind this transformation, and identify which global and regional financial companies are best positioned to benefit.
Financial Sector Acceleration
The report also argues that Asia's total equity market capitalisation could double over the next decade to $56 billion, overtaking North America as the largest equity market region and accounting for more than half of the growth in world equity market capitalization.
“China and Hong Kong are likely to be the largest source of growth for Asian equities over the next decade,” notes Equity Strategist Hany Saad. “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.