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2017 strong momentum intact, private banks expect another good year

Despite volatile markets in Q1, optimism remains high

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"On equities, we saw interest for structured notes with principal protection features on top of providing some degree of upside participation. Given the higher volatility, there was also interest in structured notes that enable clients to buy quality underlying equities at a discount to spot prices, while enjoying an attractive coupon interest at the same time." - Tan Su Shan.

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"Central banks will likely keep normalising monetary conditions, but avoid policy error (such as hiking rates too fast and causing a recession) and therefore growth will likely remain above trend. We also expect the US dollar to weaken over the course of the year, in part due to the substantial widening of fiscal deficits there." - Stefan Hofer.

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"In our latest Investor Watch Singapore survey, a majority of the Singapore millionaire respondents responded that they believe that real estate is a viable investment. Although listed Reits might potentially offer high dividends, we would caution investors to be aware that the recent rising rates could potentially pose a near term headwind to this sector." - August Hatecke.

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"As global GDP growth in 2017 was very robust, this means we foresee another strong year, especially for emerging markets and within those, especially China. The region is still 'under-owned' and valuations are attractive. Looking at valuations, we are more cautious when it comes to the US as these are somewhat on the high side and we are also careful when it comes to the UK." - Pierre Masclet.

Roundtable participants

  • August Hatecke, UBS head of Wealth Management SEA
  • Tan Su Shan, DBS Bank group head of consumer banking and wealth management
  • Steven Lo, Citi Private Bank, region head, Asia Pacific
  • Francesco de Ferrari, Credit Suisse head of private banking, CEO Southeast Asia and frontier markets
  • Philip Kunz, HSBC head of private banking, SEA
  • Pierre Masclet, Indosuez Wealth Management, Asia CEO and Singapore branch manager
  • Srini Siripurapu, Standard Chartered Bank, regional head, private banking, Asean and South Asia, and global head, non-resident Indian
  • Lok Yim, Deutsche Bank head of wealth management, Asia Pacific, chief country officer, Deutsche Bank, Hong Kong
  • Stefan Hofer, LGT Private Banking Asia, chief investment strategist

Moderator: Siow Li Sen, The Business Times

ASIA's private bank industry had a great 2017, assets under management rose a strong 29 per cent to US$2 trillion, driven by strong flows from China and buoyant financial markets, according to Asian Private Banker.

In a roundtable discussion, private bankers tell The Business Times the driving forces behind last year's robust growth remains intact and 2018's first quarter results are proof of that momentum.

sentifi.com

Market voices on:

Tell us about your performance in Q1 2018.

August Hatecke: UBS wealth management Asia Pacific delivered another set of strong results with record pre-tax profits, crossing the 300 million Swiss francs (S$401 million) mark for the first time. Our invested assets stand at 379 billion Swiss francs with positive net new money flows of 6 billion Swiss francs, consolidating our position as the number one wealth manager in the region.

Tan Su Shan: In Q1 2018, our total wealth management AUM went up by 22 per cent to S$208 billion and our total consumer banking/wealth management income also increased by 17 per cent to S$1.36 billion.

Steven Lo: We had a great start this year posting our best ever quarter. In fact if you think of 2017 as a banner year for the industry, our Q1 results are 37 per cent above last year. The strength of our performance was not attributable to any single product or country. There was consistent momentum across all product lines and all countries.

Francesco de Ferrari: We had a very strong first quarter reaching a few record highs. Net Revenues of 455 million Swiss francs, up 11 per cent; AUM 199 billion Swiss francs, up 12 per cent; and pre-tax income 170 million Swiss francs, up 22 per cent.

Philip Kunz: Off the back of a solid 2017 performance, HSBC Private Banking maintained business momentum in the first quarter of 2018. We grew client assets for the fifth consecutive quarter and attracted positive inflows of US$5.3 billion (as of March 31, 2018) in the areas targeted for growth globally.

For our business in South-east Asia, we saw similar continued performance improvement as we focus on sustainable growth. Globally, adjusted revenue was up 10 per cent contributing to a 53 per cent increase in adjusted profit before tax. It's a promising start to the year, with Asia continuing to drive growth in our global private banking business.

Markets were volatile in Q1, how did clients cope?

Steven: Clients have proven to be relatively patient through the bouts of volatility we have seen, partially as a function of generally excellent investment returns achieved in 2017. In some cases, clients were taking the opportunity of a dip to buy into risk assets. As we move into Q2, we have seen a generally "cautiously optimistic" picture emerging, and higher levels of volatility have driven higher activity levels particularly in FX.

Su Shan: At DBS, the flight toward quality and safety was evident among our clients. On equities, we saw interest for structured notes with principal protection features on top of providing some degree of upside participation. Given the higher volatility, there was also interest in structured notes that enable clients to buy quality underlying equities at a discount to spot prices, while enjoying an attractive coupon interest at the same time.

On bonds, there have been increased requests for shorter-dated and investment grade names. On mutual funds, the focus was on diversification, as flows were seen moving into multi-asset funds. Fixed-maturity bond funds generated great interest, as they were diversified pool of credits with underlying maturities that were capped.

Francesco: Amid rising market volatility, we have been advising clients to focus on balanced portfolios which provide diversification. Clients have also been interested in capital protected structured products which preserve capital while providing the option to participate on the upside. On top of this, we have seen strong interest in our "Supertrends" investment themes, which tap into long-term themes like demographic shifts and rapid technological progress. These themes can sail through volatile times and deliver sustainable returns in the long-term.

Pierre Masclet: Markets started to see increased volatility at the end of February. The VIX index that gauges volatility levels of the market in general, spiked tremendously after a very long period of almost "abnormally" low volatility levels. We had already been cautious about this low volatility level for some time and whilst we were still positive on markets in general, we had started advising our clients towards the end of 2017 to be more specific and targeted in their investment allocations, rather than just riding the momentum wave. We also advised our clients to hedge some of their positions, at least partially, and to look for capital protection where possible.

How is real estate investment as an asset class doing - Reits and or physical property - given Asians' love for property?

August: In our latest Investor Watch Singapore survey, a majority of the Singapore millionaire respondents responded that they believe that real estate is a viable investment. Although listed Reits might potentially offer high dividends, we would caution investors to be aware that the recent rising rates could potentially pose a near term headwind to this sector. UBS CIO recommends that investors should be selective in the Reits sector, as some Reits might be adversely impacted by rising rental costs.

Steven: Given the strong returns from real estate in many parts of the world over the last seven to eight years, we are seeing a little moderation in demand as expected returns have declined. We still see pockets of demand, particularly for trophy assets in key cities in Europe and the US.

Srini Siripurapu: Global Reits has been a consistent income generator for investors over the last four years from 2014 to 2017. But this is set to change, as higher bond yields put a brake to the sector's multi-year rally. In Singapore, we expect a gradual improvement in rental environment, particularly for industrial and commercial property.

There is an increasing need for higher-value industrial space including business parks due to ongoing government initiatives, and this should support the rental outlook for business parks. In addition, Grade A office rental growth could accelerate, amid benign supply, driven by the growing number of new company formation and better employment numbers.

What's the investment advice for the rest of the year?

Lok Yim: We still like equities in the rest of year, due to the resilient macroeconomic environment and the positive corporate earnings. In particular, we like European banks, as we think they would benefit from the prospect of rising yields and their better management of non-performing loans in the improving economic environment. Besides, we are forecasting weaker Euro against USD in 2H this year, which should support European equities including banks.

We still favour Asia tech stocks despite the recent pullbacks. We think Asia tech companies are on a structurally positive growth trend and their earnings growth should continue to outperform market expectations. In addition, we also like Japanese equities, as we are seeing Japanese economy is showing continual improvement with higher inflation and strong capex investment cycle.

Pierre: Our best case scenario is that global GDP growth for the year matches that of 2017 although there are regional differences. As global GDP growth in 2017 was very robust, this means we foresee another strong year, especially for emerging markets and within those, especially China.

The region is still "under-owned" and valuations are attractive. Looking at valuations, we are more cautious when it comes to the US as these are somewhat on the high side and we are also careful when it comes to the UK.

Philip: Notably, we believe EM Asia will see sustained economic and earnings growth, and it remains our favourite region in our equity allocation.

Steven: We encourage clients to remain fully diversified in terms of asset class and regional exposure and to also retain a little liquidity to be deployed into potential short term market dislocations. We continue to favour emerging markets, particularly China. We are also helping clients to increase allocations into technology names in Asia.

Srini: Equities, particularly those in Asia ex-Japan and the US, remain our most preferred asset class. We are also of the view that we are at a relatively late stage in the economic cycle, a period when equity markets tend to deliver some of their strongest returns. Our preferred area in bonds remains in emerging markets, where government bonds appear to offer a lot of value while Asian corporate bonds offer an attractive way to earn a yield at lower volatility than other major corporate bond markets.

August: UBS CIO have made some notable adjustments in our tactical positioning. This includes a larger number of currency trades that should allow for the generation of positive returns independent of how other asset classes fare. In addition, we have started to build up protective position that should do well in a steady state, but could also help performance in temporary set back situations.

Examples include an overweight of 10 year US Treasury bonds versus cash. Another example is our JPY overweight that could work well both, in case of the Bank of Japan preparing for a QE exit but also in an outright risk off scenario. In Asia we are overweight in China versus an underweight in Taiwan.

Furthermore, we have started to partially hedge some downside risk with equity put options in view of a maturing cycle. In such periods, we often observe that there are still substantial equity returns but at the same time, a higher frequency of periodic set backs.

Stefan Hofer: Central banks will likely keep normalising monetary conditions, but avoid policy error (such as hiking rates too fast and causing a recession) and therefore growth will likely remain above trend. We also expect the US dollar to weaken over the course of the year, in part due to the substantial widening of fiscal deficits there. This means, for example, that we recommend investors to buy both European and Japanese equities, without hedging the FX exposure. Our preferred sectors are financials, energy and healthcare.


Supplement editor: Siow Li Sen | Sub-editor: Shazalina Salim | Advertising sales: Jonathan Kee (Tel: 9835 5400), Adeline Sim (Tel: 9824 5086)

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