Opportunities abound in 2023 as private banks take aim at challenges facing wealth management

Lee Lung-Nien: We see more opportunities than challenges in 2023. China’s reopening, the possibility of more accommodative monetary policies globally and inflation easing will provide a more constructive landscape for investors.

Despite the recent rebound in US inflation and interest rates, we continue to believe that economic momentum there is falling and the Fed would turn dovish in the second half.

Closer to home, China’s recovery and reopening has already sparked optimism for the benefit it will bring to Asean, including the private banking industry.

Here, we expect our family office advisory to remain strong, as we see demand set to rise due to Singapore’s continued reputation as a wealth hub offering attractive tax concessions for family office setups.

We are also expecting increased synergy between our private bank and investment bank in 2023, as clients look for capital solutions for funding and IPOs.

Philip Kunz: 2023 is a year characterised by both opportunities and risks; the headwinds from slowing growth and higher rates that have been plaguing investors will remain key market drivers. But, while the cyclical outlook remains a major challenge, we are starting to see some silver linings.

The first silver lining is that the Fed policy tightening cycle is moving closer towards the end. We expect headline inflation and core goods prices to fall gradually going into 2023 but services inflation will stay sticky due to rising rents and wage growth. This means that the Fed will stay on track to hike interest rates until there are more signs of a steady fall in inflation.

The other silver lining is the reopening of China which will offset the growth slowdown in the West. China’s reopening is profound. The knock-on effects will be felt through tourism, trade and investments.

Jimmy Lee: The starting point for 2023 has been far more favourable than it was last year and expected returns have significantly increased. There is a better balance between risks and opportunities, and most importantly, there is yield in portfolios again – a situation not seen in nearly a decade.

Growth will slow in 2023, but inflation will slow even more – barring another unexpected external shock. And although there are concerns about a recession materialising, we do not expect one this year.

We see strong employment trends in many industrialised countries, which should keep their economies afloat, and regional dynamics are likely to remain very divergent.

This backdrop allows investors to capture attractive yields in quality areas, such as high-investment-grade bonds and quality stocks. Investors should also watch out for cyclical opportunities as markets may start to price in an economic recovery into 2024 as the year proceeds.

Q: Are there any potential Black Swan events that we should watch out for this year?

Lee Lung-Nien: For now, we do not foresee any major shocks, with Covid-19 risk largely contained, and China reopening and recovering. The risk from any G2 polarisation and Russia-Ukraine conflict are accounted for.

However, what we see as the biggest risk is investors being frozen and gripped by fear after a very tough 2022, and continuing to sit on cash in 2023, thus missing opportunities arising from lower market valuations.

It is incredibly rare to see the prices of both stocks and bonds fall together over a full calendar year. In fact, 2022 marked just the third time in almost a century that this has occurred.

Although history is unlikely to repeat itself exactly, it is worth noting that in both prior instances, investors who stay invested would go on to achieve returns that were significantly above average over the following 12 to 24 months.

Philip Kunz: The main risk is on the inflation front. To us, inflation has peaked and underlying inflation pressures have abated. However, if there is an unexpected supply side shock, inflation could ratchet up again, which might prompt central banks to tighten monetary policy further.

While this is not our base case scenario, it is a risk that investors should watch out for.

Currently, we are overweight in investment grade bonds with preference for short-to-medium duration. At this juncture, we are not extending the duration of our bond portfolios because of the possibility that the next few inflation reading might still be volatile.

Jimmy Lee: 2022 was a dismal year for economic forecasts and while 2023 is not any easier to read, we believe that the Fed’s effort to reduce its balance sheet represents the main policy-mistake risk.

This may lead to market liquidity suddenly drying up, which could result in financial turmoil.

Private-sector credit growth has helped to absorb the liquidity drainage for now, but it remains to be seen whether private credit demand stays elevated in the context of the normalisation of the US economy after the present reopening boom fades.

Other wild card events to watch out for this year include monetary and fiscal policy errors, a slowdown in China, geopolitics, more pandemic waves, infrastructure blackouts, and trade tensions.

Chew Mun Yew: One “Black Swan” to watch is the impact of China’s reopening on global inflation, which is the primary issue for central banks worldwide.

China’s reopening is likely to add incremental pressure on global prices, most notably in commodities and energy. As China’s outbound tourism picks up momentum in the coming months, some impact on service inflation around the world can also be expected.

The other potential “Black Swan” is the US debt ceiling negotiation which could risk a potential default.

In recent years, the US government has become very polarised and ongoing discussions are not likely to be smooth. If political brinkmanship and gridlock come to the fore, the risk of a default akin to the one that almost occurred in 2011 will increase.

This could create some volatility in financial markets and also raise the risk of further US government credit rating downgrades.

Q: Coming out of a volatile year, what are some of the key changes you have seen in the industry?

Benjamin Cavalli: We continue to see an increased pace of change in consumer behaviour, companies’ production processes and actions by governments to slow climate change – a transformation that we believe will occur over many years.

Alongside this, client demand for sustainable and impact investment opportunities has also grown significantly.

One way we are supporting our clients in their sustainable investment journey is by sharing our insights on opportunities in areas such as the green energy transition, sustainable transport and agriculture and food.

To this end, relationship managers (RMs) play an important role in engaging and advising clients who are increasingly expressing their desire to use their capital to have a positive impact on the world.

However, there is a divergence in the degree of sustainability knowledge amongst RMs in the industry, despite the employee training programs most private banks might already have in place.

To help address this, I am leading the Private Banking Industry Group (PBIG) Sustainability Taskforce in Singapore to upskill RMs in the area of sustainability and ensure standardisation across the industry.

Philip Kunz: From a wealth management perspective, we are witnessing a remarkable cross-generational transfer of wealth, with succession planning at the heart.

High-net-worth individuals and their families – those with a net worth of US$5 million or more – are expected to transfer across generations a combined US$18.3 trillion by 2030, of which Asia will account for US$2.5 trillion.

The recent HSBC Global Private Banking survey also found that 85 per cent of families globally are already preparing the NextGen to take over their businesses. By region, preparation rates were higher in both Greater China (90 per cent) and Asean (86 per cent). This reflects a strong desire among Asian families to move succession planning forward.

This trend is similarly echoed in the sharp rise in client engagements on trust and wealth planning that we have seen since early this year.

Chew Mun Yew: Clients are more aware of the importance of diversification and wealth preservation given stresses in certain sectors such as China real estate bonds.

In the past decade, credit default experiences have been stable and client portfolios have shown a noticeable home bias. However, given the heightened incidences of defaults in Asia over the past year, there has been a renewed focus on diversification across assets, geographies, sectors and strategies.

Moreover, given rising interest rates, there has also been a corresponding reduction in the use of leverage.

Jimmy Lee: The pandemic accelerated the trend of digitalisation, with more private banking clients now relying on digital channels for services and advice. The shift to remote working has increased flexibility and access for clients.

We continue to stay ahead of the innovation curve, focusing on the creation of new products, new solutions, and new experiences through innovative technology.

Amid inflation, 2022 saw monetary policy tighten incredibly fast, and we saw changes in client priorities across the board in Asia, with many focusing on preserving and protecting their wealth during times of uncertainty.

By working closely with our clients, we are able to find more opportunities aligned to their risk appetites and stay ready to deploy their firepower at the right entry points.

These industry changes have challenged private banks to adapt and evolve to meet the changing needs of their clients, but they have also presented new opportunities for growth and innovation.

Q: Have there been any changes in the demands or expectations of your wealth clients as a result of the uncertain investing climate?

Jimmy Lee: Uncertainties in the market kept investors on the sidelines, and technology-led business models have been met with doubts about their infallibility.

Julius Baer’s next phase of growth will be focused on high quality, recurring revenues that are less exposed to external factors. As such, driving recurring revenues, especially through discretionary mandates, will remain a top priority for this next phase.

We strive to optimise the mandate and asset allocation for each and every client based on a full understanding of their situation, risk appetite, and long-term investment goals. This is especially important in times where the markets are volatile and unpredictable.

The next generation of wealth management clients are wondering if the financial institutions of today will be a part of their future. We must advance transparency and add greater value to clients to accrue their trust in wealth managers.

Chew Mun Yew: The uncertain investment climate highlights the importance of timely and appropriate investment advice as the core proposition of a private bank.

Clients expect banks to plan, construct and advise on or manage a portfolio in a holistic manner rather than sell individual products.

The ability of client advisors and investment specialists to risk-manage also takes on greater importance given heightened volatility and uncertainties in the macro environment, which is expected to persist in the coming years.

Lee Lung-Nien: Clients are taking steps to deploy into risk assets, as they recognise the potential reinvestment risk of deposits.

We are seeing strong client preference towards quality and stability, with flows toward private banks who can provide a more holistic view across client portfolios while having a steady, familiar sales force.

We have seen huge interest in our “bonds are back” theme, and the higher rates have also enabled investors to participate in potential upside in risk assets with some form of capital protection.

Quality remains key and diversification through alternatives such as non-directional hedge funds and private investments remain relevant for client portfolios.

Overall, we are seeing a lot of positives and will continue to serve our clients even more this year.

Benjamin Cavalli: The reversal of last year’s negativity has been powerful, fast and surprising for many. Whether the current rally acts as a springboard for a new bull phase is far from certain at this juncture.

The new buzz word is artificial intelligence – it has been mentioned in more than 165 earnings calls and press releases this year – and it has benefited tech stocks in that space by rallying double digits.

Given the attractive rate environment, our clients also locked in rates either via longer-term USD deposits, short-duration fixed income funds or in structured rates solutions like fixed rates notes, capped floored floaters and credit linked notes.

Longer-term themes are energy transition, climate innovation tech where clients get exposure via thematic funds or closed-end well diversified venture tech funds, given the US Inflation Reduction Act and the new European industrial plan.