Supporting clients in uncertain times

ROUNDTABLE PARTICIPANTS

• Patricia Quek, managing director and head of wealth management in Singapore for UBS Global Wealth Management
• Benjamin Cavalli, head of wealth management in Asia-Pacific at Credit Suisse
• Bhaskar Laxminarayan, chief investment officer and head of investment management in Asia-Pacific at Julius Baer
• Vincent Magnenat, limited partner and chief executive for Asia at Lombard Odier
• Lee Lung-Nien, chairman and South Asia head at Citi Private Bank
• Philip Kunz, South Asia head of HSBC Global Private Banking
• Tee Fong Seng, chief executive of Pictet Wealth Management Asia

Moderator: Joan Ng, The Business Times

SUPPLY chain bottlenecks and inflationary pressures have buffeted markets and economies over the past year, pushing some investors into safe havens. Yet, high-risk alternative assets such as cryptocurrencies are also gaining ground. In this environment, top private bankers tell The Business Times how they are allocating their resources and advising their clients.

BT: What major client expectations do you foresee for 2022? Where will you be focusing more of your resources this year?

Patricia Quek: Most immediately, we are focusing on protecting clients' portfolios and derisking some parts of our clients' portfolios. As with any period of market volatility, we have the fiduciary responsibility to stay close to our clients and support them to remain invested, but help to rebalance their portfolios sensibly.

Consequently, we expect increased adoption among our clients for discretionary mandates and sustainable investments.

Almost 70 per cent of our Asian clients are entrepreneurs and we expect more of them to use discretionary mandates for their investment plans for longevity and legacy needs. Discretionary investments also reduce emotional involvement and provide a systematic approach to investing for the longer term. An example would be our latest innovation UBS [My Way].

Within 1 year since launch in Asia-Pacifc, UBS [My Way] crossed US$2 billion in invested assets. In [My Way], clients have access to over 50 building blocks including varied sustainability-focused building blocks across equity and fixed income. More than 70 per cent of our UBS [My Way] clients in Asia have selected sustainability-focused building blocks for their portfolios, with Global Sustainability single stocks and Asia single stocks as the top 2 favourite building blocks with our clients.

Many of our Asian clients are becoming more focused on sustainability because they have found that sustainable investments can generate equal or superior investment returns when compared to traditional investments.

Benjamin Cavalli: Wealth in Asia is fundamentally entrepreneurial and wealth creation is largely driven by entrepreneurs. We will therefore focus on servicing clients across topics relating to wealth planning, next generation and topics that matter to them including sustainability. We want to provide support at every stage of their journey - from the early stages, when they are just starting their journey as entrepreneurs, and are in need of structures for monetising illiquid assets; to a stage at which they are more established, and start having more cash and liquid assets to manage.

Wealth planning and family office services are also key focus areas as more of our ultra-high-net-worth (UHNW) clients enter the mature phase of their wealth lifecycle in the coming years. They are starting to think about long-term wealth management and succession planning, and need advice on structuring their wealth and managing liquidity for the next generation. We are also focused on equipping the next generation with the necessary knowledge and tools so they are well positioned to take over the management of their family wealth one day, and to grow and preserve their wealth for future generations.

Another key focus for us would be on sustainability. In Asia, we are seeing increasing interest from clients for innovative solutions in this space. Their investment appetite becomes more sophisticated and now goes beyond traditional exclusionary strategies.

Bhaskar Laxminarayan: As we enter 2022, there is a greater concern over inflation, rates and liquidity: the holy trinity that affects or determines asset prices. In the absence of structural imbalances in the private sectors of the US and EU economies, we assess a very low probability of a major bear market. Accordingly, patience is needed.

US Treasuries have regained some hedging merits. The world economy remains sensitive to asset prices. Put another way, stability in asset prices is as important for policy makers as other variables. This has not changed, in our view.

Vincent Magnenat: We recently engaged over 600 high and UHNW individuals across Asia in a study we conducted with our 6 strategic alliances and close partners. The outstanding finding we observed was clients' request for advice and guidance regarding their investments in the year ahead. This stood out across all categories (age and gender) of high and UHNW individuals and across all 8 markets.

There is a high level of nervousness among investors in these times of instability, volatility and divergence, with 1 in 5 of our clients acknowledging that they "feel lost" and would appreciate more guidance in navigating these difficult times. We also see an overwhelming majority of investors preferring to delegate the management of their portfolios to their banks. Banks such as Lombard Odier that have a proven track record of stability and can truly adapt their offerings to meet client's individual needs will be winners.

The pandemic has accelerated a lot of trends, and there are 2 key dimensions that we are focused on this year: recovery and sustainability.

As we hopefully turn the corner on the worst of the pandemic, we see an opportunity for investors to examine their allocations based on their risk profiles. Businesses that take measures to move towards a carbon net zero position will clearly be better positioned to capture better opportunities in the future and we can help them with this.

Lee Lung-Nien: Tightening monetary and fiscal policy across developed markets, such as the United States, will have a significant impact on investors, borrowers, and companies around the world in 2022. Although the global economic expansion should continue, we believe the easy money has already been made and clients will need much more tailored advice in order to safely navigate changing markets.

With this backdrop in mind, we are investing heavily in the growth of our Singapore and Hong Kong global wealth hubs in order to offer even more value to our clients. This includes a significant increase in the number of bankers and advisers, as well as beefing up our resources in terms of both technology and talent.

One recent notable example of this expansion is the dedicated family office advisory team that we have built in order to better serve this rapidly growing market segment - a key priority not only for Citi, but also for Singapore. We have been working with various law firms and accounting firms to acquire new clients in this space and will continue doing so. Other areas of focus are in the next- and new-generation client segments, as well as environmental, social and governance (ESG) matters, and philanthropy. These are areas of strength globally for Citi, and we are eager to deliver these resources to our clients in Asia.

Philip Kunz: Covid-19 has caused people to re-think the way they invest. ESG issues became an amplified focus for investors, as consumers and companies alike had to adapt to the new norm brought on by the pandemic. Similarly, we saw increased adoption of digital technology, greater emphasis on healthy living, as well as companies starting to place greater focus on building a more sustainable business.

As HSBC pivots to Asia, we will continue to harness technology to create simpler, more insightful and personalised client journeys, while giving our employees the tools needed to provide clients with the world-class services they deserve. HSBC Global Private Banking expects to invest over US$100 million in the next 2 years to build and innovate the core banking and digital platforms to meet the fast-changing wealth and lifestyle needs of our clients.

Similarly, we remain committed to do our part to help clients from across the wealth continuum - to not just build sustainable wealth, but also understand the impact of ESG issues on the community as well as the role they can play. We will continue to focus on investor and frontline employee education, product development, and investment strategies that better embed ESG principles to meet investor goals.

Tee Fong Seng: Two months into 2022, investors are increasingly concerned about the US Federal Reserve's plan to address the risk of sticky inflation by raising rates and withdrawing liquidity that helped equity markets reach records last year.

While we think an increasingly unpredictable (or inscrutable) Fed will contribute to keeping markets more volatile than before, we see volatility as an asset class in its own right - to be used by nimble investors to boost returns and protect portfolios. We believe conditions are ripe for active asset management and an active stock-picking approach among companies with structural long-term growth prospects and solid financial fundamentals. As an active asset manager, Pictet continues to bring our expertise in asset allocation, portfolio management and alternative assets to our clients through these market conditions.

On the business side, after solid growth of 20 per cent in our Asia wealth management business last year, we remain focused on a few key strategic areas. We are adding senior bankers in our Singapore and Hong Kong hubs, especially catering to mega wealth and family office clients who make up 70 per cent of our assets in Asia. We are also bolstering our wealth solutions capabilities for clients in Asia, spanning the pillars of wealth planning, philanthropy advisory, family advisory and credit; to support the increasing number of family office clients and help them protect, develop and pass on their wealth between generations.

BT: This past year, cryptocurrencies have gained in popularity among high net worth investors. What demands are you seeing from your investors for such alternative investments, and how are you responding?

Quek: Crypto coins and tokens are sometimes held out by some market participants as a portfolio diversifier or inflation hedge. We view direct exposure in crypto coins and tokens as suitable only for highly risk tolerant and speculative investors, and don't think they belong within a traditional financial portfolio.

There might, however, be opportunities in enablers and service providers who build the infrastructure behind distributed ledger technology (DLT). Our cautious stance on crypto speculation does not mean we are bearish on the adoption of digital assets or the underlying technology. We see an increasingly decentralised world, where more people and businesses rely on DLT based applications. All else equal, this requires more hardware to validate these activities on the network. This includes application-specific integrated circuits, applications processors, and graphics processing units.

Cavalli: We believe distributed ledger technologies (DLT) - the digital protocols that gave birth to cryptocurrencies - have the potential to become the technological backbone of the monetary and financial world in the future, leading to more efficient processes for customers and firms, as well as the reorganisation of business areas that could lead to both the creation and loss of jobs. We expect companies will have to increasingly invest in this transformational technology, either by purchasing solutions or by developing in-house solutions.

For the international monetary system, DLT appears to offer central banks some potential to improve the efficiency of financial transactions, especially those that are cross border, through wholesale central bank digital currency (CBDC)s. However, central banks do not intend to displace traditional forms of money, in particular money creation by commercial banks through credit. Moreover, central banks may well conclude, in some cases, that the benefits of issuing a retail CBDC do not outweigh the risks. In any case, where central banks decide to issue a CBDC, these are likely to be built within traditional money creation channels, in our view.

Laxminarayan: We prefer digital assets as the place to focus on. The term currency could be misleading when it comes to crypto. We believe digital assets are a source of wealth and will be an integral part of the investment universe in the future. We look to have relevant solutions in this space for our clients.

Magnenat: Interest has always remained strong overall but it has evolved rapidly over the last few months in an environment much less supportive of cryptocurrencies (lower liquidity/higher regulation). Clients are moving back to the theme of decentralised finance, involving markets' infrastructures, exchanges and also revised business models for long-established financial/payment companies.

This evolution ties in quite nicely with our own offering as we systematically stayed away from crypto assets' dealings, investments and custody given their excessive levels of market/operational/fraud risks while we have been an early player in the theme of decentralised finance and new technology payments, credit and insurance solutions through a dedicated equity strategy.

Lee: Over the past year and a half, adoption of digital assets has advanced and it is clear they will be part of our future. Our clients are increasingly interested in this space, and we are monitoring these developments. For many of our clients, it is more a journey of education they are interested in.

Given the many questions around global regulatory frameworks, supervisory expectations, and other factors, we are being very thoughtful about our approach.

Kunz: Alternative investments provide diversification and a potential for reducing risk. In the past decade, public stock and bond markets have been pushed higher significantly. Public market returns are expected to be lower due to stretched valuations.

Volatility is trending higher and rising bond yields are limiting the ability of bonds to diversify risk. Looking into the next decade of a more uncertain post-pandemic world, most investors will need to change tack to stay on track. Clients looking to safeguard their investment portfolios from market volatility and inflationary concerns are using alternatives to diversify their portfolios.

HSBC Private Banking has been partnering with HSBC Asset Management's alternatives team, HSBC Alternatives, to offer alternative investments globally for over 30 years. These include hedge funds, private markets and real estate. This year, we aim to broaden our alternative investments offering as well as improve solutions for top tier UHNW clients through the introduction of new bespoke and dedicated services.

Tee: At Pictet Wealth Management, we recognise that we are at a tipping point in the history of the financial system with the rise of blockchain, decentralised finance, and digital assets. This development brings new challenges. As an example, many central banks are currently studying the development of digital national currencies.

We have been looking into the cryptocurrency custody challenge, which is very different from the custody of traditional assets. It implies the custody of digital keys and entails cybersecurity risks we do not yet fully control and understand. Therefore, we are not yet able to offer such services to our clients. We also have put together a task force researching future investment solutions for our clients.

We are currently evaluating all aspects of digital currencies and intend to give our clients a comprehensive answer in the not too distant future.

BT: Setting Covid-19 aside, what event is expected to have the greatest impact on portfolios this year, and how do you recommend clients protect themselves?

Quek: We believe investors should position for rising rates. This is likely to have the greatest impact on investment portfolios this year.

Although we don't expect the Fed to tighten aggressively enough to undermine growth, we do see 3 rate rises this year starting as soon as March. This should support a further increase in 10-year US Treasury yields to 2 per cent by June and 2.1 per cent by the year's end. This is likely to drag more heavily on the valuations of growth sectors, such as tech, versus value sectors, including financials - which typically outperform as yields rise. Senior loans, which offer an attractive 4.4 per cent yield at present, are also well insulated from Fed hikes by their floating-rate structures.

Cavalli: The Omicron variant is spreading rapidly even as global inflation remains elevated. The Fed has therefore called for a faster tapering of asset purchases, which will also likely coincide with a rapid succession of interest rate hikes. Even the most dovish of the key central banks, the European Central Bank, recently wavered in its commitment to keep very easy monetary conditions in place for long.

Responses by monetary policy makers to renewed economic weakening are likely to be less forthcoming than what investors grew used to during the first waves of the pandemic, when the task was to fight deflation. Today, central banks need to focus on inflation. The latest wave of the pandemic may even worsen the inflation outlook by impeding the resolution of supply-side bottlenecks. While we do not foresee a situation as dire as at the start of the pandemic, growth prospects could wane as central banks are forced to tighten liquidity.

Credit Suisse had, in December, reduced developed market equity weighting in portfolios to strategic levels, closing the overweight allocation to equities and moving to a neutral tactical portfolio allocation.

Investors should nevertheless look to target market segments that benefit from the overall macroeconomic environment. These include key sectors such as European financials, and healthcare; key regions such as Japan and Mexico; and themes such as inflation winners and endemic Covid logistics. Within fixed income markets, we retain an underweight in government bonds.

Laxminarayan: The Fed has made a brutal shift, which became clear with the publications of the December minutes of the Federal Open Market Committee meeting. Taken at face value, they imply the Fed believes we live in a new economic regime of excess demand.

The situation of the US labour market is also a kind of a supply bottleneck. The key is to know whether it will dissipate or if it is a new normal and Western labour (US at this stage) has recovered wage bargaining power. This is key because if the Fed walks its talk and the labour market as well as other supply bottlenecks dissipate, tightening by anywhere near what the Fed is planning to do will be a policy mistake.

Last but not least, the impact on commodity prices as the world transitions to an ESG-conscious resourcing is a potential threat to prices and hence inflation.

Magnenat: In the absence of a full-blown direct conflict between the North Atlantic Treaty Organization and Russia in Eastern Europe, which we continue to consider as unlikely, there is little doubt that the key and probably only serious mover for markets this year will be the Fed's monetary policy (as it has been already since the start of this year). Markets are now pricing in more than 5 hikes of Fed funds rates in 2022. While likely persistent strong data might maintain an upward pressure on those expectations over the next few weeks, we suspect they have now moved beyond what the Fed will actually deliver by the end of this year.

With underlying growth decelerating strongly later in 2022, the markets' worries will shift rapidly from inflation to recession fears. In the meantime, if the Fed has already tightened significantly, the perspective of a major policy mistake - already partially priced in by bond markets - would trigger an ultimate sell-off in developed stock markets. The good news is that capitulation would remain short-lived as the Fed will not have other alternatives than to reverse again the course of its policy. In the meantime, in our conviction portfolios, we have cut our exposures to US equities at the end of 2021 in favour of markets under strong reflationary policies (China, Japan) or cash that we intend to deploy only if and when this ultimate capitulation will take place.

Lee: While not a single event, the major focus for investors this year is likely to be global central bank policy. With interest rates at or below zero, combined with central bank asset purchases, investors have enjoyed historically strong investment performance across their portfolios, with a few notable exceptions.

Coming into the year, we expected the Fed to gradually reduce asset purchases and begin raising short-term interest rates. However, inflation measures have been much higher than expected and could force the Fed to accelerate its tapering plans. This has already triggered significant market volatility globally as investors grapple with this new reality.

In our view, the best performing investments over the next year are unlikely to be those that rebounded most strongly over the past 18 months. To reflect this reality, our recommended allocations have shifted towards less-cyclical, higher-quality investments in leading companies within growing industries, such as global healthcare.

We are also very mindful of the effect that inflation and rising interest rates will have on client balance sheets in the coming year. Many clients hold far too much cash, which loses real purchasing power as inflation picks up, so we recommend clients deploy this cash in more productive assets that benefit as interest rates rise, such as bank loans.

Kunz: With inflation hitting decade highs in the US, it is no surprise we see inflation as a key risk. Rising inflation can erode returns for investors who are unprepared. As the market cycle shifts, stronger inflationary pressures will make the move higher for risk assets much tougher. There are a few ways to inflation-proof portfolios.

For bond strategy, there is a need to manage bond duration by rebalancing to shorter-duration bonds. For investors with excessive cash and low-yielding fixed income exposure, there is a need to shift into assets with cash flows that can reset higher in the event of rising inflation. Infrastructure, senior loans, private credit, and real estate are good choices for such income assets.

For equity strategy, there is a need to focus on quality companies with strong pricing power as they have the ability to preserve profit margins despite rising cost pressures. There is a need to rebalance some exposure into value sectors such as financial and energy, which will do well in an inflationary environment.

The next few inflation readings could be high and volatile, creating bouts of market volatility. However, we think inflation should stabilise in the second half of the year as supply bottlenecks ease. More importantly, amid the market uncertainty, we advocate a globally diversified, risk-managed portfolio.

Tee: We see a few events potentially impacting portfolios in a significant manner:

One of the most important is the tightening cycle of central banks (both US and European). This has already affected sovereign bonds, but may also affect credit markets through a widening of spreads should markets see a policy mistake.

Geopolitical tensions are bringing a lot of volatility in markets. While we cannot forecast what will happen in Ukraine, the situation keeps energy prices at a high level. Hence, central banks are facing further inflationary pressures compared to their initial forecasts, strengthening the case for more monetary tightening.

Finally, there is still the risk of a new variant emerging that would force authorities to impose lockdowns with negative economic consequences. These risks should be taken into account in portfolio management, and investors can implement option strategies when needed or favour defensive assets or currencies when seeking portfolio protection.