Pedestrians crossing the road in Hong Kong

The composition of household wealth in Asia is changing as families invest in equities and bonds

Two decades ago, investment in Asia came largely from the US and Europe. Now Asian shares are increasingly managed and owned in Asia.

This gradual ‘financialisation’ of Asian savings is changing the composition of household wealth in the region. The key is the growth of bank branch networks that reach new groups of savers, together with better banking facilities.

In low-income countries with underdeveloped financial systems, assets are often held in the form of jewellery, land or houses. As incomes rise and financial markets develop, wealth increases, and so do the investment opportunities. Families often first shift money into bank deposits and then, as wealth accumulates, start investing in equities and bonds.

Assets managed by domestic investors totalled USD10 trillion at the start of 2017, a 16 per cent rise over a year

Total deposits still remain a small proportion of both equity-market capitalisation and GDP, especially in the Philippines and Indonesia, which have low levels of banking penetration. However, deposits have increased in all Asian countries since 2011 relative to GDP, except Malaysia.

These trends have an impact on domestic financial institutions’ assets-under-management as households acquire life insurance or mutual-fund investments.

We calculate that assets managed by domestic investors – including pension, insurance and mutual funds – totalled USD10 trillion at the start of 2017, a 16 per cent rise over a year and a 93 per cent increase since 2011. The region’s domestic assets-under-management are now 57 per cent of GDP compared with 40 per cent in 2011, with increases in all countries.

The growth in collective investments (such as mutual funds and exchange-traded funds) has averaged 17.5 per cent a year – overtaking the expansion in insurance products and putting them ahead of other asset categories. Collective investments rose 34 per cent in 2016 to reach USD3.1 trillion, accounting for 31 per cent of total assets-under-management in Asia.

Taiwan has by far the largest insurance sector relative to GDP, helped by employee contributions to its national health scheme being tax deductible. Across Asia as a whole, growth in public pension funds has averaged only about 10 per cent since 2011 because most countries have no formal comprehensive pension schemes; however, growth has been strong in countries with well-established schemes, particularly Malaysia and Korea.

Indeed, Asian countries split into those with strong institutional frameworks, and those without. Markets with higher GDP per head tend to have strong frameworks, so Singapore, Hong Kong, South Korea, Taiwan and Malaysia have well-developed insurance and pension systems. South Korea’s USD462 billion National Pension Fund is one of the world’s largest.

A good institutional framework allows countries to raise assets-under-management to levels reflecting their GDP per capita. But although Indonesia and China thus have low investment for their income levels, both are actively looking to improve. Currently, 130 million Chinese investors are registered in China’s stock clearing system – 9.4 per cent of the population.

Asia’s domestic funds have gradually switched asset allocations towards shares. South Korean equities now account for 21 per cent of that country’s National Pension Fund, for instance, compared with 8 per cent in 2003. Share purchases by India’s domestic institutional investors supported the market when foreigners sold. And China now allows its USD540 billion local-authority pension funds to invest up to 30 per cent of their assets in Chinese shares.

So Asia’s domestic equity investors are gradually becoming a force to be reckoned with, their stakes rising faster than foreign investors’ holdings in five of the region’s main markets.

This research was first published on 21 November 2017.

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