Building wealth resilience today for growth tomorrow

ASIA is wealthier than ever, but a confluence of factors including the pandemic, inflation, geopolitics and unprecedented shifts in economic patterns, has made managing that new wealth more challenging than ever.

Covid and its associated economic challenges drove many economies into recession in 2020, while rising rates and a cost-of-living crisis are triggering another slowdown in 2022. But the data show that in Asia the long-term trajectory towards greater prosperity remains unchanged. Boston Consulting Group estimated last year that Asia will generate some US$22 trillion in new wealth between 2020 and 2025, and the evidence supports the trend. Our regional wealth management operation saw robust growth in net new invested assets throughout last year and that positive momentum continued through the first half of this year despite Covid and all its associated challenges.

The new wave of Asian wealth creation differs from previous waves in two significant ways. The first is the size and speed of some of the fortunes being made. Asia is increasingly becoming one of the world’s most important nurseries for tech unicorns. Last year alone the number of Asian unicorns jumped by 25 per cent to 451, and the region attracted a third of the world’s new-economy investment. Asia’s manufacturing and trading giants took generations to build, while the fortunes of some of today’s leading tech entrepreneurs were built rapidly. These new faces of wealth are already asking how they can sustain their fortunes over generations.

But it is the second trend which is likely to have a more lasting impact. Financial and digital technology is empowering millions by making financial services more accessible than ever before. These range from the young woman who has moved from the rice paddy to the factory floor and starts to use an app to make microsavings; to young entrepreneurs who are going online to diversify their portfolios into international markets; to family investors who are branching out into new instruments and asset classes.

As this new wealth flows into the system, both new and seasoned investors will need to revisit evergreen investment principles that have stood the test of time, while exploring new tactics that may offer greater resilience in these unusual times.

Long-term fundamentals matter

At times of falling growth and high volatility, the challenge moves from maximising returns to managing risk while leaving the door open to growth in a world that is fundamentally changing.

When markets are choppy, when there are few safe havens and all the short-term risks seem to be on the downside, go back to long-term fundamentals. Which countries and territories have the resources to ride out the global storm if it should come? Which industries are going to grow in the next decades, and where? Which companies are well-run, and have the resources and agility to survive the short-term pressures of Covid or rising interest rates? How is the world changing for the long term, and what opportunities will that change bring?

Rethink common assumptions

Many of the assumptions that have framed portfolio investing for generations are changing. The rule of thumb to divide a portfolio with roughly 60 per cent of the assets going into equities and 40 per cent into bonds worked for years. It was a natural hedge – when the stock market fell, the bond market rose and vice versa.

But the once-reliable inverse relationship between equity and bond prices has started to break down recently, a phenomenon clearly on display earlier this year when both stock and bond markets dipped heavily. It’s unclear if this is a long-term break from the norm, but it has spooked professional investors. A survey last month indicated that US investment managers had cut their equity exposure and lifted their cash holdings to levels not seen since the Global Financial Crisis.

But the traditional safe-havens of cash and gold no longer seem as dependable as they once were. Cash holdings are under threat from inflation, and in recent weeks the price of gold has also fallen even as inflation has risen. In the realm of unusual economic relationships, it is also worth noting that despite high inflation in the US, the greenback is stronger than ever, as it benefits from a safe-haven bid.

Diversification made better

So what does a resilient portfolio look like when viewed through a fresh but long-term lens?

The equities vs bonds split needs to be re-examined with a critical eye: is it still relevant in an age when the relationship seems to be less predictable than before and when so many other alternatives are becoming available? New digital innovations have put a whole range of other asset classes and instruments that were once the preserve of only the richest or most sophisticated investors within the reach of everyday savers. Adding some of those new asset classes could open up new opportunities and also add to diversification at a time when equities and bonds are more correlated.

Investors today have the means to construct portfolios that are both resilient and geared for growth. Instruments range from AI-powered portfolio design and the use of funds to diversify or harness secular themes, to building allocations to low-correlation ‘alternative’ assets to reduce volatility and sustainable investments to generate better risk-adjusted returns or even make an impact.

But having the means does not equate to having the know-how, and we believe that digital empowerment must be accompanied by human-led expertise and insights.

Traditional defensive stocks like healthcare, utilities and consumer staples deserve a place in the mix, but shouldn’t be the sole focus. Index funds may be a less risky way to gain equity exposure. Research by Standard & Poor’s indicates that 95 per cent of actively managed US equity funds underperformed the index; and active bond funds were not far behind.

It also helps to think about the geographic dimension of the portfolio. Just as Asian investors are increasingly looking beyond the region to diversify, globally we are seeing increasing interest in investment opportunities in Asia.

We expect Asia to grow faster than the global average this year, and the foreign exchange discipline imposed since the Asian Financial Crisis in 1997 means that regional currencies have fared much better than their global competitors such as the euro since US interest rates started to rise.

This is not the time for high-risk/high-return investment. Safety -- and future returns – lie in pinpointing long-term growth opportunities and using the myriad of effective wealth management solutions that are out there to hedge, protect and grow your future.

The writer is chief executive of HSBC’s Wealth and Personal Banking Division.