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Steadying the ship for private banking clients

“Among the asset classes, we have been positive on gold, and any weaknesses would be good entry points to accumulate gold-related exposure”, says Mr Tellier.

“Companies that score high in terms of ESG criteria and embrace sustainability as part of their strategy will outperform their peers in the long term,” says Mr Cavalli.

“During such times, when there’s emotion and volatility in the markets, going back to basics is more important than ever,” says Mr Lim.

“To build portfolio resilience and manage cyclicality, we are focusing on quality companies with sustainable earnings and manageable leverage,” says Mr Kunz.

“We have taken equities back to neutral after the first strong countermove and are now reducing the broad index of USD bonds as they recover,” says Mr Morel.

Roundtable participants

  • Arnaud Tellier, CEO, Asia Pacific for BNP Paribas Wealth Management
  • Benjamin Cavalli, Head of Private Banking South Asia, Credit Suisse Private Banking Asia Pacific
  • Sim S Lim, Group Head of Consumer Banking and Wealth Management, DBS Bank
  • Philip Kunz, Head of HSBC Global Private Banking, SEA
  • Bruno Morel, Chief Executive Officer, VP Bank Ltd, Singapore Branch

Moderator: Jamie Lee, The Business Times

IN THESE uncertain times, top private bankers are advising clients to stay engaged, hunt down value, and sieve out long-term growth trends from healthcare to artificial intelligence.

The investing trend of ESG (environmental, social, and governance) may also sustain through the ages as a global pandemic forces bigger questions on sustainability for the future.

The Business Times: Given the Covid-19 pandemic, how have private banking clients been advised to protect their investment returns over the longer term?

Arnaud Tellier: In light of the uncertainties around the Covid-19 pandemic (eg risk of second wave, duration of lockdowns) and with the global recession being the deepest since WWII, which will see potential escalation in defaults and bankruptcies, investors may consider reducing leverage and rebalancing their portfolios, focusing on quality companies during a market rebound.

Among the asset classes, we have been positive on gold, and any weaknesses would be good entry points to accumulate gold-related exposure. We also have a positive stance on short-end US Treasuries. Both asset classes are traditional "safe haven" assets, which serve as good hedging tools for investors' portfolios. Furthermore, we favour both US and eurozone investment grade credit. The investment grade corporate bond markets have become very active, thanks to the backstop buying by the Fed and ECB in their respective primary and secondary markets.

For bearish investors, principal-protected investment solutions that take advantage of market declines could be a feasible option. For those who are uncertain of market direction, investment solutions with portfolios taking advantage of diverse performances of individual securities may offer greater flexibility. As for investors with a medium to long-term view, it is advisable to gradually accumulate exposure to the megatrend investment themes such as 5G, health technology, and artificial intelligence, during market weaknesses.

Benjamin Cavalli: The current dislocation in financial markets, driven by fear hitting both private lives and the global economy, has been quite extraordinary. We have seen bold and swift policy moves around the world in terms of both monetary and fiscal policy responses. Nonetheless, uncertainties with regard to the extent of the infection and the long-term impact to the economy continue to dominate every investor's mind.

Clients had a relatively conservative asset allocation in their portfolio prior to the pandemic outbreak. An indication of that defensive positioning was a higher cash allocation in our aggregated client portfolios in early January, where clients took a constructive view about the start of the year. This was driven by a promising economic trend and improved geopolitics. As a result, clients became net buyers of equity.

Investors should not bottom-fish but rather focus on value. Historical events have shown that any dislocation of that magnitude will reward investors practising average costing after the first capitulation. This stance explains why Credit Suisse has been slightly overweight on equities since March 2020. We have also rapidly leveraged our innovative digital private banking platform and digital channels, to drive digital engagement with clients on a larger and broader scale. There was an almost instantaneous re-invention of our service delivery model where our business traffic on Credit Suisse Chat and our digital private banking platforms surged, and an exceptionally high volume of trades were executed smoothly.

On the investment front, we continued to stay close to our clients and provided de-risking investment strategies and advisory to clients throughout the month of March and beyond. Clients today have a more matured approach to risk, and lessons learnt from behavioral finance from the 2008 crisis. The unexpected by-product of this market disruption is perhaps the realisation that investors, by and large, have learned from past experiences.

Overall, we are confident that our unique integrated business model, where we provide advisory services to both corporate and private wealth clients, will put us in a solid position and complements our dedication to placing our clients at the centre of everything we do.

Sim S Lim: We recommend clients to stay engaged and maintain a portfolio approach to their investments. This year's acute market sell-down, and the rebound that followed in spite of a global economy that's deteriorating against a backdrop of massive fiscal and monetary stimulus, suggest that trying to catch market bottom would be futile. Clients are advised to construct "build to last" portfolios with multi-asset characteristics for resilience - these would include "return enhancers" like secular growth plays on technology and healthcare; "income generators" like corporate bonds and dividend stocks, and "risk-diversifiers" like gold, cash, and market direction-neutral products.

Earlier this year, we rolled out market direction-neutral outperformance strategies as a solution for scenarios where markets may not continue on their upward trajectory - these have delivered positive returns for our clients even when markets declined due to Covid-19. Clients have also been able to take advantage of better entry levels during the initial drawdown to invest in our flagship portfolio products such as the DBS Global Income Note, DBS Multi-Index Liquid Credit Note and the DBS CIO Barbell Strategy-Linked Note.

As we move into the second half of 2020, we will continue engaging our clients closely to understand their take on the economy and the risk levels they're comfortable with. Based on these, we will monitor and tap market conditions to identify attractive entry opportunities and come up with interesting product expressions.

Philip Kunz: Apart from the tragic loss of life, Covid-19 is leading to a big economic downturn and a crisis of confidence. Bankruptcies and the rise in unemployment could delay and limit the speed of the recovery. Great uncertainty around any economic scenario complicates matters for investors. We are positioning for a U-shaped scenario and strive for portfolio resilience, constructed with the intention to weather short-term volatility, while maintaining exposure to safer areas of the market to participate in the eventual market recovery that we expect.

We encourage investors to adopt a multi-faceted strategy to find growth in what is otherwise a low-growth environment, income in a low-yield environment, and manage portfolio volatility amid widespread global uncertainties. To build portfolio resilience and manage cyclicality, we are focusing on quality companies with sustainable earnings and manageable leverage. We pick stocks and themes supported by long-term growth trends such as healthcare and the digital economy, to look through any short-term economic risks.

Bruno Morel: The Covid-19 pandemic has sent financial markets on an unprecedented rollercoaster ride. There are hardly any historical parallels that offer observers much support or orientation. According to VP Bank's baseline scenario, we assume that this crisis will leave very deep ruts in the economic landscape in the second quarter. The return to social and economic normality will be slow and gradual, but we believe it will take place in 2020. Pandemic doesn't mean panic. In such times, we should remain calm, not act rashly and balance the risks in the portfolio - not only in terms of equity risks but also interest rate, credit and liquidity risks.

We have already taken equities back to neutral after the first strong countermove and are now reducing the broad index of USD bonds as they recover.

We used gold as a hedge starting last year in the risk-on risk-off environment and have increased it to overweight in current turbulent times as the precious metal tends to stabilise the portfolio. Generally, avoid situations in which you have to sell. Liquidity is limited in many asset classes during such stress phases and the price markdowns can therefore be enormous. Maintain a broad diversification and if possible, even broaden it. Consistently hedge currency risk and do not add any new credit risks. Last but not least, opportunistically take advantage of buying opportunities, while always closely monitoring your own risk budget. Clients who have invested on their strategic specifications are advised to adhere to their allocation even after suffering losses. Within an individual portfolio, however, investors should focus on high-quality securities. This applies not only to equities but also to bonds. Previous market corrections have shown that when the market climate becomes dismal enough, phases of extreme share price losses are always followed by periods of strong recovery. All it takes is good news.

BT: With private banking clients in Asia seeing their wealth tied to their business which would be affected by Covid-19, how are private banks providing holistic advice to ensure clients' wealth can endure through these difficult times?

Mr Tellier: Although the current pandemic is not something that anyone could have anticipated in advance, it provides a perfect opportunity for testing the agility and efficiency of front-and-back-office focused digital solutions that we have developed. And the outcome so far has been extremely positive. Many of our client-centric applications are already available on myWealth, our e-banking platform.

We have recently launched the digital leg of our advisory service, which is a major step for us in blending human and technological capabilities to deliver the full value of BNP Paribas Wealth Management offerings to clients. In addition, we continue to use traditional tools such as emails and phone calls to update clients on various investment opportunities; these include non-traditional formats such as webinars and audio conference calls. Such virtual engagements are essential in ensuring that we provide timely advice and address clients' needs in this turbulent time. We will continue to make full use of digital tools in client interactions and we expect that such tools will become an important and regular feature in our business model.

In addition, we are adamant in maintaining that our clients' interests are the first priority. For instance, we have been paying attention to clients' business circumstances, particularly in our credit decisions. In many cases, we have made our strong balance sheet available to clients for additional financing.

Mr Cavalli: With the vision of being "the Entrepreneurs' Bank of Asia", we are committed to serving our clients across the region through our integrated private banking and investment banking platform. Our unique business model has enabled us to serve our UHNW entrepreneur clients in a truly integrated way. We have joint coverage of UHNW clients between private banking and investment banking and a single point of entry for financing, across both the private and corporate aspects of the UHNW entrepreneur. We believe we have the right business model in Asia to meet our clients' current and future needs and position Credit Suisse strongly for long-term success.

A key competitive advantage of Credit Suisse is our ability to bring all the resources of the bank together for our clients. Our model is best suited to these Asian entrepreneurs' needs. The integrated platform enables us to effectively serve the current and future generation of clients throughout their entrepreneurial life cycle, for both their corporate and personal wealth needs.

Our Apac strategy and the close collaboration across the integrated platform have been the key differentiating attributes for our success in the region, and have underpinned the strong financial performance at the bank.

Mr Lim: During such times, when there's emotion and volatility in the markets, going back to basics is more important than ever. In our conversations with clients, we consistently reiterate one thing - the need for a well-diversified portfolio that takes a portfolio approach (meaning investment decisions are based on probabilities, not possibilities), and is built to grow over the long term. This will give them the comfort to stay invested for long, rather than overreacting to headlines and shorter-term events.

This isn't an easy conversation to initiate, particularly with business-owning clients who are used to making decisions around individual companies or ideas. However, our clients have grown to recognise the value of taking a broader approach - partly through several solutions that we've developed in recent years that serve to demonstrate the benefits of diversification, such as the DBS Global Income Note (a diversified basket of individual bonds). In addition, the acceptance that Covid-19's impact is profound and protracted has also nudged clients to place more focus on probability-based, long-term money management strategies, rather than trying to guess where and when bottoming of the market may occur.

Mr Kunz: We understand that this is a hard time for our clients in both their investments and businesses. HSBC is a universal bank with the ability to bring our expertise across the wider group in order to help our clients tide through this difficult moment. While the private bank is focused primarily on managing, growing and preserving our clients' wealth, we are able to look beyond our clients' private banking needs to holistically support their business, family and legacy.

From a business perspective, we are able to consider our clients' needs in areas like cash management and working capital financing. Looking ahead, when the Covid-19 pandemic eases, we are able to advise our clients on the potential opportunities - whether it is merger & acquisition possibilities or capital raising - to grow their businesses. Through the area of Private Wealth Solutions, we can also help to provide advice to clients to ensure their wealth can endure through difficult times. Clients generally want to provide stability and security for future generations. Detailed family and estate planning will help our clients achieve these goals. With the current impact on their businesses, this is more important for our clients than ever. Appropriate structuring through a trust can separate wealth from business assets, providing peace of mind to clients and their families. Liquidity planning can also provide much needed cash to meet future obligations, whilst securing wealth for the family members.

Mr Morel: Covid-19, or rather the economic impact of the containment policies, poses a challenge to many companies at the moment. But if clients have planned for a similar situation as now, they will endure through these difficult times. As the 34th United States president and general of the US Army, Dwight "Ike" Eisenhower, said: "Plans are worthless, but planning is everything."

Clients should separate their personal wealth from their business wealth, just as their personal life from their business life.

That does not mean they cannot use their personal wealth to invest in their business or help their business over a difficult period. Segregation of wealth is a management of risks. For clients who already have a plan, the current situation is a test on how well the plan is working and to make adjustments. For those who do not have a plan, this is a good time to start. In the meantime, as in your personal portfolio, stay calm and balance the risks. Those principles that apply to your personal portfolio can be expanded to your business. Estimate where liquidity is needed and how to obtain it, eg if through your personal portfolio, which securities can be liquidated and still within your risk allocation. Do not enter into any new credit risk, and for those with excess liquidity, this is also an opportunistic time to acquire some other business or even to expand.

BT: Can interest in the ESG investments be sustained in these times?

Mr Tellier: The Covid-19 pandemic is accelerating trends in ESG investment and smart sustainable cities. After the pandemic, we believe that governments will identify multiple shortfalls on healthcare as well as the economy as a whole during the outbreak. Additional resource allocation and more efforts to fill the gaps are expected. With some governments already increasing fiscal spending which targets to build a more sustainable city, the pandemic could expedite and magnify the urgency to build up new, smart and sustainable ESG infrastructure for the economies.

Public-private partnerships involving cooperation between governments and the private sectors to create new business and governance models would become the trendsetter. This would translate into increasing opportunities for companies, with the relevant capabilities, to commercialise certain disruptive technologies emphasising on sustainable ESG design and elements. We foresee structural changes on the public health system and towards smart and sustainable economies on the horizon. These changes present many exciting opportunities in the years ahead.

Mr Cavalli: According to industry studies, firms with higher ESG ratings have generally outperformed their peers in the recent downturn. In addition, while "traditional" ETFs have seen outflows, it is observed that ESG ETFs have continued to see inflows. Particularly, we see that key impact investing themes like edtech and healthcare are booming during this period because of the pandemic, as these themes are benefiting from remote learning and an online healthcare provision. For example, when the Indonesian government instituted school closures as a measure to slow down the virus transmission in March 2020, Ruangguru, an edtech company in Indonesia, supported government efforts by providing online schooling on its platform to the K12 students. As a result, the company saw increased student usage and engagement levels for its products. In general, we continue to believe that impact investing is attractive, especially in volatile times.

In fact, sustainability is increasingly becoming a priority for companies as well as for investors, driven by Gen Y's and Z's concerns for sustainability challenges such as climate change. From a consumption perspective, humans are also increasingly reducing food waste and adapting their dietary habits. A plant-based diet can not only have a positive impact on our long-term health, but it can also help further reduce greenhouse gas emissions by bypassing the methane emissions caused by animals. We are convinced that companies leading the change towards more sustainable agriculture and food production will likely benefit from the combination of an increasing population and its need for more food coupled with emerging food trends.

Overall, we believe that companies that score high in terms of ESG criteria and embrace sustainability as part of their strategy will outperform their peers in the long term. At Credit Suisse, our chief investment officer applies an ESG overlay to the entire security selection for the growing number of sustainable investment solutions.

Mr Lim: While cheaper oil prices could encourage consumption in the short term, we don't foresee this having a significant or lasting impact on interest in ESG investments. In fact, a look at recent data shows that ESG investments have continued to outperform traditional portfolios, particularly those in emerging markets and non-US developed markets. This could be due to ESG offerings being less exposed to the oil-and-gas sector, which was badly hit during the market correction.

Encouraged by growing evidence of the correlation between robust ESG practices and strong corporate financial performance, clients are increasingly expressing interest in ESG investing, a trend we believe will continue. When markets stabilise and normalcy resumes, we expect to see stronger client awareness, interest and demand in this space.

Mr Kunz: At HSBC, we believe that sustainability is an important trend that investors can no longer ignore. Instead of waning demand, we believe that there could be potential for a greater focus on sustainability and ESG in this current time. In the same way this global pandemic is an issue that has brought the world together, climate change and sustainability is an issue that (i) involves the entire world, from which no one will be able to self-isolate; (ii) is a known risk predicted by science to be the central problem for tomorrow; and (iii) we can only address if we act in advance and in solidarity. We believe that quality companies that focus on ESG factors are companies that are better managed and more suitable for portfolio construction for the long term.

Overall, we are seeing that interests in sustainable financing and investing have sustained during this period. Major producers of oil, steel and energy products have been announcing more stringent carbon mitigation strategies in recent months while policy makers around the world also continue to push forth their climate change agenda. Every investor can choose where they want to be on the sustainability spectrum. But the traditional approach of ignoring sustainability altogether is no longer viable as it ignores the many ways companies' fundamentals are being affected by sustainability.

Mr Morel: Sustainable investing means integrating ESG factors into the investment decision-making process to gain better insights into long term risks and opportunities. Companies that perform well on ESG are typically higher quality and therefore tend to be more resilient. Several studies show ESG investments outperformed in the first quarter of this year. 2019 saw record inflows toward sustainable investing show that interest and demand is there. This will only continue to grow. Not only has sustainable investing weathered this storm better, but interest hasn't waned. VP Bank's group strategy for 2025 includes sustainability and sustainable investment. The current crisis has not changed these priorities and we will continue to develop our offering in this area.

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