AI represents opportunity for investors, and a means for private banks to better serve them

Francis Liu: Several sectors may experience strong demand and revenue growth, but adoption remains early stage, making it difficult to foresee which business models will succeed.

In this first phase of monetising, investments in semiconductor infrastructure look attractive. We favour semiconductor producers that are serving the cloud market, and so are exposed to AI developments.

Victor Aerni: We believe in approaching the AI theme carefully.

Aside from concerns about jobs, the recent growth and upsurge of interest in AI is related to its potential to disrupt business models, lift productivity and create strategic advantages for well-placed technology-related companies.

With valuations high, however, it makes sense to look carefully at how one approaches the AI theme.

Well-known, established companies active in cloud infrastructure could be a major beneficiary of AI’s growth. Data-centric generative AI needs large cloud platforms, known as hyperscalers.

Semiconductor companies have an obvious role in AI’s development, as do providers of AI-powered software and applications, with established platform vendors standing to be among those that benefit the most.

Finally, we believe generative AI will up the demand for cybersecurity solutions.

Chew Mun Yew: In the near term, immediate beneficiaries are the pick-and-shovel companies, such as those in the semiconductor industry, as well as hyperscalers that will experience a growth in revenue from rising adoption of the technology.

Eventually, more companies might benefit as industry-relevant applications are developed.

Non-tech companies could also eventually benefit from an overall rise in macro productivity as a result of either reduced costs or accelerated innovation.

While this trend signals positivity in this theme, the sharp rise in share price could lead to the risk of a near term correction – especially when the revenue accretion will take some time to realise, a phenomenon seen in many nascent technologies in the past.

For example, it took Google several years to scale up its search capabilities to be highly profitable.

Investors could consider buying the dips, take the dollar-cost averaging approach and avoid names that are excessively overvalued.

BT: How has AI changed your business?

Bacon: We see a broad range of exciting, transformative applications for generative AI, and are focused on exploring AI to amplify the power of our people – not as a way to replace jobs.

It’s an opportunity to enhance our work and processes, substantially increasing productivity, and freeing up time for more innovation.

At Citi Private Bank, we have several partnerships across AI, data, digital assets, financial planning, communications and collaboration.

For instance, we are exploring AI-powered voice experiences for our clients and internal staff. It will be capable of translating up to 30 languages.

We also partnered with a fintech startup to help create customised educational material for our next-gen audience – for example, how to run a family office or build an art collection.

Closer to home, AI is being used in several areas. These include enhancing the suggestion of new products to clients based on product characteristics and past client behaviour, and understanding the deposit behaviour of clients – so we can better serve them.

Yap: We are looking at certain use cases to drive efficiency and workflow. Examples are automating tasks for the firm where possible, reducing errors in information retrieval, and utilising analytics.

From a customer perspective, we are looking to improve our customer experience by understanding customer insights, analysing relevant data, and providing targeted content to achieve further personalisation where possible.

What is certain is that AI is a technology that can transform every business in every industry. However, it requires an understanding of its benefits and challenges, as well as a clear strategy to implement it effectively and responsibly.

Lee: AI has revolutionised the way we do business at Julius Baer. While maintaining our core values, we are striving to integrate advanced technologies, including AI, into our operations.

To this end, we have committed to invest one billion Swiss francs (S$1.5 billion) globally over 2023 to 2025 to enhance our digital channels and improve our e-banking capabilities.

We are not just investing in technology; we are also fostering an innovation culture. Our innovation lab, Launchpad, situated in Singapore, encourages collaboration among our colleagues, clients, partners, startups, and experts worldwide to develop, test and pioneer disruptive solutions at a faster pace.

Furthermore, we are enhancing our digital asset offerings for clients and incorporating AI-driven solutions into various aspects of our business, from robotics to data intelligence.

Particularly, AI is playing a significant role in risk management, including areas such as fraud detection and anti-money laundering.

Liu: AI, including technology more broadly, has in recent years improved efficiencies in wealth management by performing repetitive yet complex tasks faster than humans.

This allows our bankers and experts to focus on high value-added activities, such as fostering stronger relationships or providing better, more personalised, advice.

AI has helped to augment the client experience, which is still centred on human interactions, and we take pride in building these long-last relationships with our clients.

Aerni: Pictet is in the process of using machine learning to deploy various solutions to help with the efficiency and effectiveness of some of our operational banking processes, in areas such as fund operations, finance and client register.

We are also starting to use generative AI to improve the performance and capabilities of our website, and to help employees more easily find internal information.

On the investment research side, we are starting to trial AI use cases to sift through and make sense of large amounts of data from annual reports and other disclosures – to speed up and fine tune the work of our analysts.

Yet, recent developments in the global banking industry have reminded us of the importance of trust in our industry.

Pictet’s model as a private partnership solely focused on wealth and asset management is designed to ensure that we keep the trust of our clients.

This distinctive culture of Pictet is differentiating and something technological advancement cannot replace.

Chew: Harnessing the power of AI or drawing insights from data will be the future of investment advisory, as it allows the business to better understand the client’s investment behaviour and risk appetite.

This will augment the adviser’s capabilities and know-hows, enabling them to be more personalised and effective in client engagement.

BT: There are growing expectations of a recession this year, at least in some economies. What are clients doing to prepare for it?

Bacon: We don’t believe that the United States is heading for a deep downturn. Instead, we see it as a rolling recession in which some industries contract (manufacturing, mining, financial, construction), while others expand (travel and leisure, health, education).

The combined effect is a less volatile business cycle than previously expected.

The recent drop in inflation adds to our conviction that the US Federal Reserve does not need to tighten much further and should allow the economy time to digest the tightening already put in place.

We believe this is the ideal backdrop for investors to return to a balanced core portfolio.

We continue to like high-grade bonds, as their returns are expected to be significant in the two years after the last rate hike.

In equities, we would like to shift towards small and medium-sized profitable companies in growth industries, as well as non-US markets including Japan and select emerging markets.

We also like alternative investments that can take advantage of tighter liquidity and distressed situations.

Yap: The talk about recession has been ongoing for a while this year. There is a likely outcome of some economies heading into recession, but on a global level we don’t think it will. Even if there is one, it would likely be mild and shallow given the strong labour market we are experiencing.

The recent consumer price index reading out of the US might have also implied that the current interest rate hike cycle has peaked or is near its peak.

Clients’ cash levels have remained relatively high throughout the year given the cash rates coupled with the uncertainty over the economic and inflation outlook at the beginning of the year.

Having said that, we did witness clients increasing exposure to fixed income and fixed income funds. This aligns with our house views on the asset class, given its risk-adjusted returns profile.

Lee: At Julius Baer, we advise our clients to adopt a conservative yet fully invested stance.

This means fixed income investors should look at staying in quality and locking in decent real yields as long as they are still positive.

We also suggest cutting exposure to high-yield bonds to underweight, both in the US and Europe, as default rates may jump in the second half of the year.

In equities, we suggest owning defensive sectors and maintaining a quality and large-cap bias. The communication sector presents an excellent opportunity given its size, defensiveness, and quality.

In terms of next-generation themes, investors can look into cloud computing and AI, and consider the attractiveness of our shifting lifestyles theme, as they generally exhibit a lower sensitivity to global equity markets, thereby providing a more conservative exposure to structural growth, while valuations are around historical averages.

Investors who want to position themselves more defensively against the backdrop of a challenging cyclical outlook should consider themes such as digital health, extended longevity, and genomics, which remain very compelling, factoring in both the development of demographics and the technological progress in those segments.

Abundant investment opportunities exist even amidst challenging news flow, making it crucial to act before markets start repricing.

Liu: We advise our clients to have an active asset allocation model, and to create a resilient portfolio with a mix of alternative investment solutions and strong fundamental growth assets.

We take an agile and active investment approach, while maintaining a neutral exposure to risk assets, positioning portfolios for fundamental long-term growth and shifts such as the transition to net-zero.

Aerni: Business activity continues to suggest economies are holding up better, with services activity mitigating contracting manufacturing activity.

The US economy continues to hold up comparatively well despite monetary constraint and credit tightening, though we are expecting an economic slowdown in the second half.

At Pictet, we hold a disciplined, long-term view on investments without losing sight of clients’ interests. We believe asset allocation is an essential contributor to returns in the long run, and we implement this through a core/tactical portfolio construction methodology.

Since the beginning of the year, we have been positive on bonds. Clients are locking in higher, attractive yields within their all-weather, core portfolio through mandates or fixed maturity products.

Clients are also tactically trading volatility as an asset class to mitigate portfolio risk and monetise uncertain markets. Options and structured products are actively traded for the purpose of equity hedging, yield enhancement and capital protection.

Chew: With the Fed maintaining a restrictive stance of monetary policy for an extended period of time, the risk of a recession towards year-end or early next year has risen.

We recommend clients anchor their investment opportunities in sectors that will weather a recession better, such as selected technology companies that have undergone a broad sell-off in 2022 or defensive sectors like healthcare, utilities and consumer staples.

In the case of a recession, the Fed will eventually reduce interest rates and this will benefit high-quality bonds.

As uncertainty rises in the macro environment, we recommend investors have an allocation in alternative investments such as hedge funds and private credit, as a defence against a drawdown in public markets.

Keep the portfolio well diversified and build recession resilience into it.