While client sentiment has improved over the last 12 months amid expectations of interest rate cuts and a rally in US stocks, private banks still face challenges when it comes to shifting portfolios out of cash and into riskier investments, leading fund selectors said at Asian Private Banker‘s Funds Selection Nexus 2024 Hong Kong.
With short-term risk-free deposits still yielding up to 5% and clients seeing their portfolios bruised in recent weeks by a sell-off in the AI space, private banks have turned to answers ranging from investment grade (IG) credit to hedge funds. The topic has gained more urgency with the US Federal Reserve widely anticipated to begin its interest-rate cutting cycle later in September, prompting a rally in the bond market.
“I do feel that clients are moving back into the market, just that we need to find a way of moving back, whether it is fixed income, whether it is structured products or other alternative ways,” said Yvonne Leung, managing director and head of managed solutions, Asia, at J.P. Morgan Private Bank, on a panel session entitled ‘Crafting Resilience – Fortifying durable portfolios in an unpredictable environment’.
When it comes to regional clients, according to Gabriel Chan, head of investment services, Hong Kong, at BNP Paribas Wealth Management (BNP Paribas WM), sentiment has also been stabilised by an improved performance in Hong Kong stocks. Chan pointed out that the Hang Seng Index is on track to post its first positive annual return since 2019.
Fixed income: dipping your toes into the market
Gabriel Chan, BNP Paribas
For clients looking to put their cash to work, Chan advises high-quality IG US bonds with a duration of three to five years as an initial step before potentially increasing the duration.
“I can see a lot of Asian investors are still underweighting fixed income investments,” he told the close to 100 delegates at the event. “With the imminent interest rate cut, the era of the banks paying you 5% to do nothing is over.”
Christina Au-Yeung, Morgan Stanley
To Christina Au-Yeung, head of investment services at Morgan Stanley Private Wealth Management Asia (Morgan Stanley PWM Asia), US high yield is one area that clients can also consider, given these credits are less sensitive to the interest rate cycle.
Jeffrey Tam, head of fund specialists, Hong Kong, at Julius Baer, believes high-quality IG bonds should still be kept in portfolios for hedging purposes, while longer duration positions can be added on the rationale of making capital gains.
Navigating the US election
Yvonne Leung, J.P. Morgan Private Bank
Leung explained that she has been leading clients to think about fundamentals instead of focusing on the outcomes, as well as having discussions with clients on hedging uncertainties through structured products.
“If you look at statistics and how the market behaves from 1928 onwards, you’ll see the return of non-election and election years are always around 7.5% to 8%,” said Leung. “It also depends on whether there is a slight win by either party.”
Tam has been convincing clients to increase portfolio diversification through the addition of market-neutral hedge funds and noticed the proliferation of multi-strategy hedge funds, which are then used as core allocations to build out a hedge fund portfolio with satellites added around it.
Jeffrey Tam, Julius Baer
“One satellite we’re particularly fond of right now is systematic and quantitative market-neutral hedge funds. They have zero correlation to traditional risk assets and improve your portfolio’s risk-adjusted returns,” said Tam.
Tam also pointed out that Asian clients have typically under-allocated to hedge funds over the past few years due to the concentrated equity market. While the S&P 500 outperformed hedge funds as a whole, with volatility and normalised rate environments, Tam sees hedge funds starting to generate strong risk-adjusted returns.
On hedge funds, Morgan Stanley PWM Asia has been positioned quite aggressively on the long side of themes such as AI, healthcare, Japan, and India, said Au-Yeung.
Yet, she pointed out it is important to have managers who are good at spotting short-side opportunities to participate in the performance of such long-term structural themes and manage downside volatility.
“We’ve seen a lot of the easy money made on these thematics. We think it’s much more of an alpha-driven opportunity now, and we’re quite comfortable taking some direction out of it,” said Au-Yeung.
Looking beyond mega-caps and large-caps
Tam noticed opportunities emanating from the global mid-cap space, which is historically more cyclically tilted due to its high industrial and financials exposure. While the industrial sector suffered from the global manufacturing recession with the longest destocking cycle in recent years, Tam pointed out recent PMI data have bottomed, signalling green shoots from the manufactoring scene.
“We prefer high-quality mid-cap stocks, as we believe rates will remain relatively elevated in the foreseeable future, so the low-quality mid-cap stocks will continue to suffer,” said Tam.
