Private banks aim for post-Covid growth

Roundtable participants

• Vinay Gandhi, Singapore CEO, Bank J. Safra Sarasin
• Robert Hoffman, Head of Investment Counselors, South Asia, Citi Private Bank
• Benjamin Cavalli, Head of Private Banking South Asia, Singapore CEO and Asia Pacific Sustainability Leader, Credit Suisse
• Joseph Poon, Group Head, DBS Private Bank
• Lok Yim, Managing Director, Deutsche Bank Head of International Private Bank APAC; CEO, Deutsche Bank Hong Kong Branch
• Philip Kunz, Head of Global Private Banking, South Asia, HSBC
• Vincent Magnenat, Limited Partner & CEO, Asia, Lombard Odier
• August Hatecke, Co-Head Wealth Management Asia Pacific, UBS Global Wealth Management; Country Head, UBS Singapore

Moderator: Vivien Shiao, Banking and finance correspondent, The Business Times

WITH the economy on track to bounce back from the worst of the pandemic, private banks are gearing up to seize the opportunity as Singapore continues to benefit from wealth flows. At the same time, the burgeoning number of ultra-rich families and individuals in the region are also asking how they can do good and do well.

Environmental, social and governance (ESG) issues are fast becoming some of the hottest topics among the well-heeled, and private banks are finding ways to meet this growing demand.

But despite the global economic recovery underway, there are also risks on the horizon that these private banks are watching out for. These top private bankers tell The Business Times what lies ahead when it comes to their clients' investments.

BT: With ESG gaining more traction here in Asia, how should clients position themselves on this front?

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Vinay Gandhi: Global environmental challenges such as climate change are increasingly captured by regulatory developments.

Leading up to the UN Climate Change Conference, COP26, big economies such as Japan, South Korea and China increased their climate ambition and set climate targets to achieve net-zero by 2050 or 2060. Additionally, companies and financial market participants alike are increasingly mandated to disclose climate-related risks. Furthermore, countries such as China, Malaysia, South Korea and Singapore are developing sustainability taxonomies mirroring the pace and scope of the European Union's (EU) ambition towards sustainable finance.

In this environment, clients can mitigate sustainability risks by considering ESG criteria and pursue opportunities by investing in businesses which have lower ESG risks (that is, by actively managing them) or which provide the right solutions by addressing important trends.

Robert Hoffman: ESG factors have gained such prominence today that the topic has become a focal point for not only investors, but also the companies in which they invest. For example, seven of the 10 largest publicly traded companies globally have formally set a target date for carbon neutrality.

While some of this focus can be attributed to increasing regulatory and environmental concerns, there is also mounting evidence to suggest that companies with higher ESG scores tend to have stronger financial performance than those with lower scores.

While there are many ESG considerations, we believe that the growing focus on sustainable energy will only further intensify over the next several years, and will present investors with significant growth opportunities.

Whether they seek exposure to specific companies or to the broader theme through professionally managed portfolios, we have designed tools to help make this process easier for clients.

These include a bespoke ESG analytics tool, which provides insights on a portfolio's ESG risk scoring and alignment with UN's Sustainable Development Goals and carbon footprint of investments, and a section within our Mid-Year Outlook watchlist, which evaluates portfolio exposure to our "Greening The World" theme.

Benjamin Cavalli: With sustainability fast gaining traction as a key investment theme, we have seen appetite from clients accelerating both ESG and impact investing solutions. We are therefore focused on creating and facilitating investment products and services that generate environmental and social benefits as well as target competitive financial returns.

At Credit Suisse, we continue to expand our ESG product suite in both equity and fixed income funds, recently adding Asian ESG funds alongside the current suite of ESG funds.

Combining our Credit Suisse House View with ESG convictions, "ESG Integrated" is a set of best ideas for investors to gradually transition to multi-asset portfolios that are competitive based on both traditional financial performance metrics and ESG metrics.

"ESG Integrated" is part of our Signature Convictions, which includes food revolution, impact investments solutions such as microfinance and biodiversity products, sustainable emerging market bonds, ESG subordinated bonds, green real estate and the climate change supertrend of equity investing with a thematic focus on decarbonisation.

On impact investing, in Asia-Pacific, we anticipate a more systematic roll-out and focus on impact investment and sustainability-related opportunities that many clients, especially next generation clients, are interested in. This includes supporting Asian SMEs to become market leaders in agriculture, healthcare, affordable housing and education, or investing in companies that work towards environmental and more specifically, ocean improvement.

Joseph Poon: When exposure to ESG is expressed via thematic investments, then we suggest keeping it as a satellite allocation with no more than around 10 per cent of one's portfolio. However, we generally discourage thinking of ESG as a product construct. Rather, ESG is more appropriately considered as a way of investing; of applying an additional qualitative overlay over and beyond traditional financial analysis, to arrive at more rigorous and holistic investment assessment.

Integrating ESG as an investment screening criterion can help strengthen portfolios and enhance returns. Growing research suggests a positive and resilient association between good ESG characteristics and strong company financials, and hence potential for long-term outperformance.

Investments with good ESG attributes are by definition better placed to navigate present and future E, S and G risks, so adding an ESG lens to investment analysis help investors flesh out sources of non-traditional risks that may have otherwise escaped standard financial analysis.

Therefore, when integrating ESG as an investment criterion, we encourage our clients to do so over their entire portfolio; to review all holdings and replace lowly ESG rated holdings with better-rated alternatives where possible. We believe looking at investments via an ESG lens should be as much a matter of hygiene as using financial analysis.

We are seeing rising awareness and adoption of this holistic assessment approach. This was in part catalysed by the visceral impact the pandemic had on our environment and society, and partly by clients' wishing to understand all risks affecting the value of their individual investments. For others, this served as a reminder of the benefit of maintaining well-diversified portfolios to mitigate all risks in a systemic way.

Lok Yim: Over the last few years, we have seen growing demand from clients for investments that address sustainability issues. Based on a recent survey by our CIO office, over 75 per cent clients of respondents agree that investments should have a positive impact in the world.

In Asia, governments are increasing their ESG efforts. For example, China has the ambitious "carbon peak by 2030; carbon neutrality by 2060" de-carbonisation plan, and Singapore has the Green Plan 2030.

With ESG and sustainability critical for our bank, our clients, and wider society, we believe that clients in this region should identify areas where potential ESG risks lie, and at the same time develop innovative mitigation strategies. As long term performance is key, we need to weigh short-term profit vs long-term risk, in order to achieve a balance.

At Deutsche Bank Wealth Management, our multi-asset investment strategy combines our global CIO investment process with ESG-filtering and exclusion criteria. Our Discretionary Portfolio Management ESG solutions follow a combined strategy of best in class and exclusions, ensuring we invest only in companies and funds that demonstrate good management of ESG factors, and are not involved in controversial or harmful activities.

We offer an increasing range of thematic ESG funds covering the areas of the circular economy, new energy, sustainable water, UN Sustainable Development Goals. In sustainable financing, we support our clients in their ESG transformation, and in the near future are expanding our financing offering with 'green lending' solutions.

Philip Kunz: Asia is still very much at the beginning of its sustainable investing journey, with the trend only having gained traction in the region over the past two years. One thing is clear however, investors in Asia are now keenly aware of the importance of incorporating ESG considerations in their strategies.

The key drivers for future take up of ESG investments include the development of products matching risk and return goals, a wider range of ESG investment vehicles and strategies, government incentives and better information on investment performance and ESG issues.

There is growing evidence that incorporating strong ESG considerations can improve portfolio resilience by mitigating risk. Putting a sustainability lens to investments does not necessarily mean sacrificing returns. In fact, companies that mitigate risks can capture ESG-related opportunities over the long run.

There are several ways in which investors can gain access to ESG investing. The most straightforward method is through negative screening or removing companies that are generating negative externalities in society or the environment. ESG integration is becoming mainstream as investors include ESG factors for their security selection when it comes to their portfolio construction. Investors are also viewing the sustainability revolution as a theme to capture structural growth opportunities. Hence, investment themes such as global energy transition, China's green revolution and sustainable healthcare are gaining traction.

Vincent Magnenat: The global market for ESG investment solutions has been remarkably buoyant in recent years - in 2020, the Global Sustainable Investment Alliance reported US$35.3 trillion worth of sustainably managed assets. Asia is no exception as it displayed double-digit growth rates in the last years. While this appetite is to be celebrated, now more than ever, investors should pay particular attention to the quality and legitimacy of the products and services they are being offered. Indeed, while the rest of the world's market for sustainable investment keeps expanding, Europe, which launched a regulatory crackdown on greenwashing via its EU Action Plan, showed a US$2 trillion market contraction in sustainably managed assets between 2018 and 2020.

When selecting an investment product or provider, investors should pay particular attention to the following: Is the approach to sustainable investment science-based? Is it grounded in sound economic and financial thinking that reflects plausible sustainability transition scenarios? Does it entail a comprehensive view on the sustainability of not only business practices but also business models? Is the approach forward-looking or merely focused on historical data? Does the sustainability assessment pay attention to context, especially to the specific transition pathways inherent to different industries and geographies?

Sustainability is a critical vector of investment risks and returns. As such, it requires dedicated expertise and investors should demand it.

August Hatecke: We have seen strong traction among our APAC clients in sustainable investments over the past year. For example in APAC, our flagship 100 per cent sustainable investment mandate reached a major milestone when it quadrupled to US$4.5 billion in APAC by Q2 2021, up from US$1 billion at the beginning of 2020.

Looking ahead, we recommend that investors focus on companies with strong sustainability practices and longer-term investment trends including healthcare, green technology and plant-based alternatives.

We estimate that current markets linked to the healthtech theme exceed US$100 billion. We project that healthtech's growth rate could reach the upper single digits or even higher over the next decade. The global plant-based meat market is set to multiply threefold from 2019 to reach US$51 billion in size by 2025. Green technology including alternative energy sources such as solar and wind energy would also present investment opportunities for many investors.

Globally, UBS has seen core sustainable investments - which are products that involve a strict and diligent asset selection process across key SI strategies - surge by 62 per cent to US$793 billion in 2020 to make up nearly 20 per cent of all client-invested assets. Our new investment solution "MyWay" which allows clients to select among nine SI-focused building blocks across both equity and fixed income have also seen strong traction. More than 70 per cent of all our My Way clients have selected sustainability focused components for their portfolios, testament to the growing awareness and adaptation of sustainability in investor portfolios.

BT: What are the risks ahead for investments and how are you advising clients to hunker down for volatility?

Mr Gandhi: There is a growing sense of unease being felt by investors, and their growing concerns are completely justified. We are living through a period of unprecedented economic, political, and social changes. Global debt as a percentage of GDP had reached unsustainable levels prior to the Covid pandemic, and these levels have accelerated higher as governments around the world deal with the impact of the economic shutdowns.

Inflation concerns are growing due to supply chain disruptions and growing weather related volatility. Clearly, any one of these risks can cause uncertainty in the investment decision making process. Currently, we have to simultaneously factor all of these risks into our investment framework.

In every crisis lies great opportunity. Seemingly, central banks' monetary policies have reached their limits, allowing government fiscal policy to take centre stage. In this regard, many governments have committed to large infrastructure deals and clean energy projects to tackle the climate emergency. The implications of this coordinated fiscal spending creates many opportunities for investors over the medium to long term. Rebalancing portfolios to take advantage of these structural trends is likely to provide investors with the much needed alpha during this period of uncertainty.

Mr Hoffman: Unexpected setbacks related to the Covid-19 pandemic remain the top risk for investors for the foreseeable future. As the virus continues to mutate in ways that make it either more contagious or more harmful, expectations for the timeline of a resumption of normal business and economic activity will be pushed further out. This will cause ripple effects across many markets which this resumption has already been priced in.

To defend against this volatility, now is the time for investors to increase the quality of the assets they own. Companies with a history of stable earnings, low leverage, high free cash flow, and a track record of consistently growing dividends have historically outperformed during volatile periods.

However, this time around, those same companies are trading at a discount to the broader market which should make this "rotation to quality" even more appealing for investors.

Mr Cavalli: Survey data, exceptionally strong inflows into equity market funds, as well as other contrarian tactical indicators continue to point to elevated investor optimism. This carries with it the risk of a temporary market reversal.

Nevertheless, we remain neutral at the main asset class level but express a cyclical bias within individual asset classes. The continued strength in the global economy is likely to lead to further above-average growth in corporate earnings. Within developed market equities, for example, we prefer UK and Spain equities.

Mr Cavalli: Within equities, we also prefer an exposure to the rotation trade via outperform views on sectors financials and materials, as well as Eurozone Value and Small Caps.

We remain positive on Asian equities over the medium term as the region benefits from strong global economic growth. This is expected to lead to above-trend growth in corporate earnings. Within Asia, we favour Korean equities, which we think are best placed to benefit from the global recovery.

As for risks, we believe that goods inflation has overshot substantially but this is likely to gradually erode. The recovery in services demand, though, may lead to upward pressure on wages, and another leg of elevated inflation. Such a situation is most acute in the US; other developed economies are less likely to see persistently high inflation. The Federal Reserve has become more hawkish and is likely to begin tapering asset purchases this year. We however still expect US yields to rise modestly in line with forward rates, and we maintain a neutral US duration view. We still believe that global government bonds remain unattractive and therefore keep exposure below benchmark allocations in portfolios.

We note the renewed rise in Covid-19 infections in developed market economies. However, progress in vaccination efforts should significantly limit the impact of further outbreaks on economic activity going forward.

Mr Poon: There's a myriad of risks on the horizon, but three key known risks to watch are the "VIP" risks - virus, inflation and policy risks.

Firstly, virus risk. The unconstrained spread of viral variants poses perhaps the foremost threat to the global economy's smooth reopening. Much remains unknown, be it in terms of potential virus mutations, or vaccine efficacy rates in combating such variants. World economies should expect reopening to occur in fits and starts, and divergence between developed and emerging economies; the former having seen higher vaccine distribution rates, and greater willingness and ability to employ fiscal and monetary levers to support their economies.

Secondly, inflation risk. On one hand, the Fed persists that inflationary pressures are transitory, pointing to how inflation's strongly observed only in segments related to economic reopening (air fares, fuel prices etc.), while unemployment rates remain above targets. Yet, cost pressures continue to build from the ground up as supply chains remain disrupted, and pent-up demand is left unspent with savings rates at elevated levels. These expectations will continue adjusting to new data, likely leading to market volatility down the road.

Lastly, policy risk. The world economy is undergoing a complicated transition, and central bankers will have to thread the needle to maintain market confidence. It's key to exit extraordinary monetary policy effectively as economies recover, to prevent excess from fuelling asset price bubbles; yet a perceived earlier-than-expected withdrawal of policy support can hurt sentiment. As the world prepares for gradual removal of quantitative easing (QE), policy communication and execution can and will be a trigger for market gyrations.

Faced with such unknowns and potential volatility, clients should remain invested in diversified portfolios. We advise clients not to time the market, and to focus instead on long-term secular trends. We believe the technological disruption trend remains irreversible, and have presented the I.D.E.A. framework - representing Innovators, Disruptors, Enablers and Adaptors - to pick winners in the new economy. For clients who have yet to gain exposure to I.D.E.A. companies, future market volatility might just be that opportunity to pick up these investments at fair valuations.

Mr Yim: We see three key risks for investments. Firstly, we see the possibility for the Fed to tighten monetary policy. In the United States, because of higher inflation readings, we think the Fed could soon discuss the exit of QE programmes. Secondly, we see prolonged US-China tensions, which may feed into companies' supply chains and cause further disruptions. Investor sentiment could be affected by any escalation of the tensions in trade, finance and technology areas. Thirdly, the risks emanating from the ongoing pandemic and the spread of the Delta variant across the world may feed into further lockdowns, delays in travel and tourism and hence delay growth recovery for many countries.

While these risks exist, we are overall still constructive on markets and our advice to clients is to stay invested while ensuring that portfolios are diversified with a robust asset allocation process. We have seen significant interest in our range of Strategic Asset Allocation investment strategies which focus on efficient and transparent investment strategy while benefitting from a risk management overlay.

We recently launched the income version of the same strategy, given demand from our client base for alternative sources of income while retaining transparency and liquidity. Increasing volatility also gives rise to tactical investments like credit relative value trades across the capital structure and also across different names. Technology will continue to bring disruption and we encourage clients to keep an eye on the long term by investing with high quality managers both in the venture and private equity space.

Mr Kunz: The global economy is surprisingly on the upside, and the recent earnings season has been one of the strongest in history. Clearly, the positive economic momentum continues for now. But as higher expectations are already priced in, it will become more difficult for data to surprise on the upside.

In the next stage, we think it is good to start to differentiate more, and to focus on areas with the best prospects, especially in companies and sectors with robust structural growth outlook. In the short term, investors will closely monitor regulatory risk and any data point around inflation, and these developments could lead to market gyrations.

To manage volatility, investors should diversify their portfolios across asset classes and geographies. They should also keep exposure to industries with structural growth opportunities, such as digital and sustainability.

Mr Magnenat: Over the last 15 months, all risky assets have accumulated formidable returns, boosted by unprecedented policy stimulus, the perspectives of economic re-opening and the hopes that vaccines would rapidly eradicate the pandemic. Many of those drivers are now behind us. Growth is already decelerating and inflation should follow by one quarter or two. Those developments remain compatible with persistent bullish equities markets, absent any major policy mistakes.

By contrast, any premature signal of a rapid tightening in financial conditions would trigger a brutal correction in growth assets such as cyclical stocks, commodities and high yield credit. Even if the probability of such a scenario remains low, we continue to recommend our clients to stick - for their core portfolio's holdings - to a strict discipline of diversification between macro factors, including long duration bonds which, while uninspiring from a yield dimension, remain the ultimate hedge versus risks on growth.

Mr Hatecke: At UBS, our CIO does not expect the delta variant to disrupt the economic recovery. A continued risk-on stance in equities is warranted, and we favor sectors and regions that have the most to gain from the reopening trade.

Investors should remain invested and stay pro-risk. Against a backdrop of accelerating growth, we expect cyclical parts of the market to outperform, including energy and financials, and Japanese stocks.

We estimate economic growth for Asia ex-Japan will notch above-trend rates of 7.9 per cent this year and 6.2 per cent next year, and most central banks in the region should stay accommodative into 2022.

The current economic environment is conducive for higher industrial commodity prices, in our view, and we expect broadly diversified commodity indexes to deliver total returns of about 10 per cent over the next six months.