Lok Yim, head of Deutsche Bank International Private Bank APAC 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.
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 appears to be doubling down on the zero-Covid strategy and this will remain the case until after the Winter Olympics in Beijing. This could present a challenge for the economy, which has been on a weaker footing in 2H21. With the ongoing domestic weakness and external uncertainty over US-China tensions, we expect continued volatility in Chinese asset classes. Policy easing could provide some support for growth, but regulatory tightening may endure. In our view, the heightened volatility could present some selective opportunities for long-term investors.
While valuations of Chinese stocks may now look attractive after recent declines, caution is still advised in the medium term – on account of regulatory concerns, slower Chinese growth, tighter credit and the problems in the real estate sector.
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?
Inflation and central banks will be in focus. This should be the year where central bank policy really starts to change gear – with other central banks starting to follow the Fed’s line on tightening. But there will be plenty of other regime shifts underway too (in terms of inflation, climate, geopolitics and technology, among others). Acting now on strategic asset allocation and ESG in portfolios should help capture this process of change. This is an important time to focus on strategic asset allocation. Market timing around such complex processes of change will not be enough, with an effective strategic asset allocation likely to prove a much more effective and reliable source of long-term returns.
Environmental and ESG issues more broadly (including social and governance aspects) will become even more important for portfolios. The switch to a carbon-neutral economy will create many interesting opportunities.
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?
We should not assume that a very traditional asset allocation (such as the classic 60/40 equity/bond allocation) will work well. More sophisticated approaches will be needed. Even relatively small changes in interest rates can have major direct and indirect effects on asset classes.
Portfolios need to be built on the assumption that while some interest rates are set to increase, we are not going back to a “normal” situation. Changed correlations between asset classes mean that traditional portfolios (such as a 60/40 equities/bonds split) cannot be relied on to provide protection in the event of a market reversal. ESG strategies, alternative investments and additional risk controls will all have a role to play in portfolios in 2022.
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?
The push for specificity and granularity vis-à-vis ESG impact is already becoming a key theme in the ESG market and there has been a significant rise in KPI-linked bonds, loans and derivatives.
Of the three components of a typical ESG decision, the focus may be moving from the first two (the economics of the deal, and the framework or taxonomy surrounding it) to the third – measuring and monitoring the impact. This impact is local but financial firms providing finance or managing it will have to aggregate it at a global level.
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?
A customised solution is one of our priorities when serving clients. Therefore, we pay great attention to whether candidates can provide tailored advice on top of their experience and knowledge.
With our business spanning different regions around the world, we believe that the opportunity to serve clients in the region with the exposure to our global footprint around the globe is one factor that looks attractive to candidates.
It is not easy to hire talented relationship managers and front-line staff, but it is important for us to complement our existing talent base and help us scale up in targeted footprint markets.
At Deutsche Bank, we are committed to building a talent pool and training our talents from front to back to support the industry growth.
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)?
Government support in the form of building a strong financial and legal infrastructure allows a clear and transparent tax regime. A stable business environment, a favourable tax environment, plus a pool of professional financial management talent are crucial considerations for us when we expand.
In the course of 2021, many private banks have grown their business presence in Singapore as the industry saw more business opportunities among Greater China clients in the city state. What is your private bank’s business split across Hong Kong and Singapore now compared to 12 months ago? Do you think the shift of gravity in business across Hong Kong and Singapore has reached an equilibrium?
We have dual hubs in Singapore and Hong Kong. While Greater China remains a focal point for expansion, Southeast Asia market is buoyant and presents tremendous opportunities.
Meet 2021’s industry leaders in the full round up of of Asian Private Banker‘s The Final Word 2021.