Arnaud Tellier, CEO Asia Pacific, BNP Paribas Wealth Management 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?
It is correct that the majority of Asian wealth is located onshore. However, most of the UHNWIs are entrepreneurs who have created considerable wealth by capitalising on the opportunities of the rapidly growing economies of Asia, in particular, China. This is the segment we target and we believe that we are one of the best-positioned international financial institutions to serve them in Asia Pacific for a number of reasons.
As wealth grows, these individuals — who have succession and wealth planning needs, and who have an institutional investor mind-set — prefer a more professional approach to managing their wealth.
This is where global universal banks come in. They have the international connectivity and in-house capabilities to meet the increasingly sophisticated needs of UHNWIs in this region.
For BNP Paribas Wealth Management, we have fostered a trusted relationship with families and entrepreneurs in the region; these are multi-generational relationships which have grown into regional and even global players in some instances.
BNP Paribas has a legacy of over 160 years in this region, with a presence in 13 markets. Not only do we have a strong franchise and brand name, our ability to draw on the strength of the ‘One Bank’ model in the region and our European connectivity set us apart from others.
The ‘One Bank’ model can only grow stronger with the amazing trend of wealth creation through business creations and innovation in the region. Meanwhile, we are able to take full advantage of the capabilities of our investment bank as well as our asset management and real estate business to serve global and sophisticated investors.
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?
China’s economy weakened in 2021 due to the property downturn, COVID-19 restrictions affecting consumption growth, and regulatory pressures. The Central Economic Work Council and Politburo meetings in December 2021 have resulted in a focus on economic stability rather than deleveraging. It was stated that fiscal policy will be front-loaded, including boosting infrastructure spending.
China is the only major economy loosening not tightening policy in 2022. The government has pledged to cut fees and taxes with a combination of fiscal incentives.
We are starting to see signs of outperformance in the most beaten down areas — such as Hong Kong equities +5% year-to-date and the MSCI China.
We are positive on China equities thanks to the improving credit impulse, which historically has been positive for markets. We prefer domestic China A-shares as they would benefit directly from policy easing.
Hong Kong-listed Chinese equities could see a gradual reversion to the mean this year because of their cheap valuations and below average global investor positioning. However, a sustained rally would require more positive catalysts, such as more clarity on regulations and upward earnings revisions. A hawkish Fed and stronger dollar could be headwinds and trigger volatility in the short-term.
The biggest uncertainty is pandemic-related restrictions amid China’s “zero-COVID” policy. Positive surprises would be larger-than-expected policy loosening, signs of regulatory relaxation on the internet and property sectors and a resolution on the ADR de-listing issue.
Opportunities will develop for broader China and Hong Kong equities and selected China bonds where yields are attractive for patient investors in 2022, especially as valuations remain alluring. We believe that the policy will finally turn into a positive catalyst.
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?
In 2022, uncertainty will remain and volatility will prevail as inflation, central bank reactions, the threat of new variants and geo-political tensions are key risks that will combine with high valuation of some sectors.
We have identified five investment themes in 2022. One is ‘Riding a New Inflation Regime’, in that inflation and the Fed’s policy tightening will continue to take the driver’s seat in the financial market. This remains our key theme. We favour energy, mining, resources and financials sectors, real assets (particularly Asian commercial real estate) and commodity currencies.
The next themes are “Identifying Winning Investments & Innovations” and “Repair, Reuse, Recycle”. Both public and private sectors are increasing capex significantly with the former to stimulate economic recovery and to meet aggressive net zero targets (e.g. Joe Biden’s infrastructure bill and the EU’s Recovery Fund), and the latter to upgrade technology for remote working and to resolve supply chains disruptions. This gives rise to plenty of interesting opportunities in areas such as health tech, infrastructure, smart technology, sustainable food and energy transition. Companies did not invest in capex during the last cycle, hence, the shortage in so many sectors when economies reopened.
Our fourth theme is “Small is (Still) Beautiful”. Small caps tend to outperform large caps in the long run and especially during times of economic expansion, as where we are now. Also, large companies have been actively acquiring smaller companies at a premium with the number of M&A deals reaching a record high. The recent underperformance provides opportunities to add this as part of a satellite allocation.
Theme five is “Enter the Metaverse”. In terms of megatrends, Facebook changed its name to Meta and the term “Metaverse” is causing a buzz. Investors should grab the opportunities and be among the first to “Enter the Metaverse”. As yields rise, the US technology sector underperforms. As the market prices in rate hikes, the correction in technology shares will create opportunities in specific niches to invest in this megatrend.
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?
Fixed income investing has been challenging in an era of zero or negative rates. We remain underweight government bonds, which had negative returns in 2020 and 2021.
However, there are opportunities in fixed income. For example, clients that are overweight fixed-rate exposure can diversify via floating rate bonds and leveraged loans. Also, default rates remain low in investment-grade and high-yield credit providing opportunities for incremental yield pick-up. In emerging market bonds, local currency issuance provides a generous yield pick-up as those central banks raised rates aggressively last year ahead of the Fed. Many of these countries are commodity-producing countries and their currencies have rallied this year even as US interest rate hike expectations increased. Finally, selected Asian high-yield issuers offer a healthy yield pick-up after the sell-off in 2021.
There are many other portfolio diversifiers and no single asset class or investment theme can consistently outperform in all years. The key is really to build a portfolio of solutions and diversify — non-traditional ways to generate income include private credit, private residential REITs.
Lastly, one point to add is rising yields are good news as this year could provide more chances to reinvest at higher yields. We are confident there will be more attractive opportunities in fixed income in the coming 12 months.
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?
What really stood out last year was the rise of SRI, globally and even in Asia. Extreme weather and events highlighting social justice issues both contributed to ESG rising to the top of the agenda for investors and policy makers. A record US$700 billion poured into ESG-focused funds worldwide and the MSCI World ESG Leaders Index rose more than 22% compared with the MSCI World’s 15%.
COP26 was another watershed moment where despite the challenges and geopolitical constraints, the world committed to reducing coal usage, limiting deforestation and cutting methane emissions, among others. We know that this process will require vast amounts of financing, both public and private.
We are convinced that this is the way forward and have been working towards it for several years: our know-how and our position as Europe’s leading bank will be put to work for a more sustainable and inclusive economy.
In line with our ambitions to be a world leader in sustainable finance, we are putting our expertise at the forefront of global transitions, for instance in energy and mobility.
By joining the UN Environment’s Net-Zero Banking Alliance last April, we committed to accelerating the pace of financing a carbon-neutral economy by 2050.
We have been engaged in developing products, services, metrics and methodologies that have been enabling sustainable change for many years now, and we are developing proprietary tools to measure the impact.
We were one of the first to put in place a robust and reliable sustainability rating methodology, called Clover Rating, which allows clients to identify the level of sustainability of their investments.
In addition to ESG integration into our product selection framework, we have increased the breadth of our offering to enable clients to identify solutions that best match their investment interests. Our product offering builds upon our core sustainable investment strategies such as water scarcity, climate change, environmental impact and sustainable food manufacturing, to include more recent trends in renewable energy, electric vehicles and ecosystem restoration strategies.
From a portfolio perspective, a core and satellite approach can be employed to “hedge” investors’ portfolios against climate change. However, the most comprehensive and effective approach is to employ ESG integration across mainstream investment portfolios. Climate change represents investment return and investment risk, and portfolios should be constructed accordingly.
How important is governments’ support to ensuring family office industry prospers in the region? What is at the top of your wish list for how governments in Hong Kong and Singapore can support the private wealth management industry’s development (e.g. less travel restrictions, more tax incentives, review/relax on a particular regulation)?
Indeed the demand for family offices in Asia is increasing as the number of wealthy individuals in the region is rising rapidly. At the same time, the need for sophistication and professional management has risen. This creates opportunities for professionals in Asian financial hubs like Singapore and Hong Kong.
The demand is certainly strong, and a favourable regulatory environment and tax regime are key to the development of the family office industry. Therefore, government support is essential together with close cooperation with the industry.
Singapore has been very active in creating an attractive environment for family offices since 2019. The government and MAS are pushing the overhaul of an industrial, regulatory, tax and immigration policy to support the development of the wealth management industry.
As a result, the number of family offices setting up in Singapore increased significantly. According to Singapore’s Economic Development Board, the number of family offices in Singapore increased fivefold between 2017 and 2019. As of the end of 2020, there were 400 SFOs in Singapore, and the number continues to grow.
Meanwhile, Hong Kong too is ramping up its efforts in strengthening its position as the regional family office hub. In June 2021, the government’s InvestHK department set up the FamilyOfficeHK Team to provide one-stop free consulting services for family offices. The city has also offered tax incentives benefiting family office businesses.
Meet 2021’s industry leaders in the full round up of of Asian Private Banker‘s The Final Word 2021.