Andy Chai, Asia CEO, Bank J. Safra Sarasin shares his views with Asian Private Banker in ‘The Final Word’, a year in review by the region’s private banking leaders as they share their thoughts and opinions on key issues around industry trends, investments, regulations, and technology in 2021, as well as providing their predictions for 2022.
Given the majority of Asian wealth is located onshore, how should international private banks best target and differentiate themselves in these markets? For domestic regional private banks, what is the most effective strategy for competing with international players?
The private banking industry has evolved much over the last decades. Private bankers, in addition to having the skillset to develop and nurture client relationships, are expected to have a good understanding of global markets, macroeconomics and even geopolitics, in order to cater to the clients’ evolving needs, fill the potential gaps in their investment portfolios, meet their financial goals and advise on their business and wealth succession planning.
Long-term thinking is the main condition for real and lasting economic success and private banks have to stay ahead of the market. In the last couple of years, ranging from young next-generation clients to sophisticated entrepreneurs, all are becoming more environmentally and socially conscious, and ESG has gained so much attention. J. Safra Sarasin has been adopting a sustainable investment philosophy for over 30 years, where sustainability is an integral component of the corporate strategy, and the lens for the viability of investments.
Sustainability and climate change took something of a backseat for many in the face of the pandemic. However, we have actually accelerated and broadened our commitment to the sustainable investment approach. Sustainability considerations play an essential role in identifying the winning business model of tomorrow. We have a well established approach to thematic investing, across the four broad themes of Green Transition, Changing Consumers, Technology Disruption and Future of Health. The latter two themes have proven to be particularly attractive to clients who are looking to benefit in the short term and to be structural winners in the mid and long term. We have been incorporating a sustainability mind set at all times to increase the quality of our analysis and raise the level of our insight.
The last 12 months have been volatile for investors in China, from the meltdown in the high-yield bond sector to regulatory actions targeting sectors such as technology. How are you advising clients to invest in the world’s second-biggest economy in 2022?
We believe the Chinese government will try to avoid a hard landing for the economy, hence we expect it to deliver a timely monetary and fiscal stimulus. An increase in local government borrowing to support public sector investment projects, such as on infrastructure, or a reduction in the minimum reserve rate for commercial banks are two options that we think are likely to be deployed to stimulate the economy. This would pave the way for a rebound in the Chinese economy from 2Q22 onwards.
In general, we expect China’s economic recovery next year to provide some tailwind to emerging markets fixed-income assets. Credit spreads of hard currency and corporate bonds are in line with the long-term average. At the same time, foreign trade positions are robust in most emerging markets and we expect low default rates for corporate bonds. The largest risk factor in 2022 is a rapid rise in US sovereign bond yields. Government bonds in local currency are likely to remain volatile in the months ahead. Inflation in emerging markets will keep rising. We expect central banks to implement further rate hikes of significant magnitude. While this should initially impair the performance of local currency bonds, they will become more attractive in the medium term thanks to their higher yields. As a result, we expect very favourable entry points this year.
What will be the key investment themes that shape both global markets and those in the region in 2022 and how is that feeding into how you advise clients?
We expect economic growth to remain strong and labour markets to improve in 2022 and 2023. Supply bottlenecks and COVID-related restrictions have led to temporary setbacks and will probably persist, though to a lesser extent. Still, strong demand means that companies have more pricing power and workers more bargaining power than usual. Both should contribute to relatively elevated inflation rates even once the impact of the jump in energy prices has faded. In our view, central banks will therefore have to remove monetary policy accommodation faster than they have so far indicated.
Moderating global growth and a more hawkish Federal Reserve have strengthened the USD this year. We expect the dollar strength to continue over the coming months, because the risks remain tilted towards an earlier US policy rate lift-off. Cyclical factors may become a headwind for the dollar later in 2022. The euro should benefit from a pick-up in manufacturing activity along with commodity currencies, while the Brexit-related drag on UK growth should weigh on the GBP in the coming year. Both the Swiss franc and the Japanese yen should benefit from low inflation rates. We finally also turn more constructive on gold.
One of the most-repeated views over 2021 was that the ‘60/40’ portfolio is dead, given the ultra-low to negative yields offered in many parts of the sovereign bond markets. From alternatives to commodities to private credit, how are you helping investors to allocate assets in what was traditionally the fixed income part of their portfolios?
A still solid, but moderating macro environment and inflation rates that are too high for comfort will lead most developed central banks to increase policy rates in 2022 and beyond, although they will operate on different timelines. Forward markets are already in the process of pricing in the expected path of the respective policy rates over the coming years. This environment is conducive to higher bond yields and flattening pressure on yield curves, mainly in the 5y/30 segment as intermediate maturities will likely underperform. Record low real yields in developed markets should have some upside in 2022 as policy rates go up. However, we expect the upside for bond yields to be less pronounced than in previous cycles.
Sustainability is higher up the agenda for investors than ever, with last year’s United Nations COP26 event underscoring the scale of effort needed to achieve global net zero emissions by the middle of this century. How are you helping your clients to remove ESG risk from their portfolios and embrace sustainability in their investment strategy?
We are a pioneer with more than 30 years of experience in sustainable investing. As a family-owned entity, sustainability is in our DNA. We have developed our own proprietary sustainability tools and have a large and experienced team that integrates sustainability into each step of the investment process.
We can empower clients to achieve their financial and sustainability goals by providing superior sustainable investment solutions as actively managed sustainable investment funds or customised mandates across all asset classes. We believe that sustainability is a long-term force for change. That is why we integrate environmental, social and governance (ESG) factors across our investment solutions, actively engage with companies, and target better outcomes.
Our proprietary and innovative sustainable investment tools help reduce reputational risks and improve the ESG profile of portfolios. We are committed to the Paris Climate Accord and to reporting transparency regarding ESG factors, SDGs and climate change mitigation.
Sourcing talent in the region’s private bank industry is becoming tougher than ever, pushing up hiring costs across the region. How can private banks ensure they have adequate access to the talented relationship managers and other front-line staff over the coming years? What is the key to attracting the right candidates?
To capture the growing business opportunities, hiring high quality bankers and retaining our talents are of utmost importance. Compared to early 2020, we are pleased that we have almost doubled the private banker headcounts as of today.
Since the private banking industry is still growing, there is a shortage of private bankers. The war for talent is beyond anything we faced in the past. Hence, some private banks have started looking at hiring RMs from the premier banking segment. We would assess their investment knowledge and understanding of the industry before taking them on board and transforming them into private bankers.
J. Safra Sarasin is well capitalised with a strong balance sheet and has over 180 years of history. We are one of the few family owned private banks with a global footprint. Our in-depth insights to the industry, entrepreneurial mindset, open architecture, comprehensive credit offering and robust product platform enable us to support our talents to thrive and to support clients to build their legacy with us. We have a simple organisational structure and open culture which allow staff to work effectively and efficiently, and our private bankers to focus on building their own business.
We are pleased that our brand attracts new talent in all regions. It is only on the back of our culture and versatile platform that we can ensure different types of bankers succeed and clients entrust us with wealth management services.
Meet 2021’s industry leaders in the full round up of of Asian Private Banker‘s The Final Word 2021.