At a time when rising prices are dominating the global financial market and stock market volatility is unsettling – ‘geopolitical risk’, ‘inflation’ and ‘recession’ are what is keeping Prashant Bhayani on his toes as he is responsible for developing global asset allocations for some of the wealthiest families in Asia.

In fact, these are the three things that clients are most concerned about today, the Asia CIO of BNP Paribas Wealth Management told Asian Private Banker.

“Because there is the important that is analysable but knowable, where one can come up with an analysis of either you’re right or you’re wrong. And then, there is the important but unknowable,” he said.

Geopolitical risk, for example, Bhayani feels one is prone to have less conviction simply because of the nature of the opacity. The situation in Ukraine right now – while some are under the impression that it will go on for years – others feel there will be a stalemate in autumn.

“We just don’t know,” he stressed. “So at this point, we have to look more at what’s priced in the market. Things like this you worry about, but then you also have to understand the context of it and the implications for energy prices.”

“What would happen if natural gas was shut off, and what does that means for German and European corporates who need that feedstock to run power plants run chemical factories,” he questioned.

“This could lead to a technical recession. It’s not like an economic analysis, geopolitical risk is hard to analyse as we don’t have a lot of visibility on the situation.”

Inflation above pre-pandemic average

Bhayani is betting on a 35% probability of a US recession in the next 12 months, based on market factors and what’s priced in various indicators. He has downgraded his US GDP growth forecast to 2.6% in 2022 and 1.9% in 2023.

For the Eurozone, the bank has revised down its GDP growth forecast to 2.5% for 2022 and 2.3% for 2023. In China and India, it is expecting growth to be 3.7% and 8.3% this year and 5.7% and 6.2% next year, respectively.

“These targets could move – but they’ve been clearly moving down and that reflects their rising recession risk,” he added, pointing out that “we are expecting bigger recession risk in Europe than the US right now because of the war”.

Moreover, with natural gas and food prices higher, inventories building up and waning consumer demand, that too raises recession risk. “Inflation and recession are linked,” he said.

“What will cause the recession is the fact that central banks have said that they will raise interest rates because inflation is so high. They have no choice but to raise rates into a slowing economy – and that’s a big risk.”

Still, Bhayani remains hopeful because he is seeing two thirds of developed economies consumption moving from goods to services, where consumers are dining out and traveling more, not to mention shopping online, a trend that was fuelled by the pandemic.

“They [growth] haven’t slowed enough to put a recession risk in our view because services spending is still robust. But there’s definitely a slowing and when you have these turning points, things get more volatile.”

Given the higher energy and food prices and uncertainties, BNP Paribas is expecting inflation to likely settle above its pre-pandemic average in most countries.

Overweight Southeast, likes alternatives

The bank remains neutral on global equities and continues to recommend high dividend/buyback stocks. It likes UK, Singapore, Indonesia and Latin America equities. In China, the bank invests via A-shares, plus has upgraded Asian financials to neutral from negative as net interest margins are expected to improve for banks.

“We’ve been overweight Southeast Asia because it is opening up … and valuations are also very attractive. Inflation is an issue like everywhere, but it’s not as much of an issue because we still have more slack in these economies.

“Indonesia and Malaysia also benefit from higher commodity prices, and Thailand will benefit from reopening obviously,” he explained.

However, concerns over commercial and retail properties in Hong Kong and weaker Indonesian credits saw BNP Paribas downgrade credit for both countries from positive to neutral.

Elsewhere, the wealth manager likes US short-end treasuries and emerging market bonds, as well as gold, real estate and macro and event-driven hedge funds. It is neutral on US investment grade and high yield.

Lombard Odier, Citi PB asset allocation calls

Meanwhile, Lombard Odier is betting on quality stocks to outperform in challenging market environments, “especially during slowdowns and cyclical recessions,” noted CIO Stéphane Monier.

“Our current allocation favours value over growth, and we have increasingly applied a quality overlay to stock selection this year,” Monier wrote in his latest CIO view.

“One reason is a price correction. Valuations of quality stocks have fallen back to long-term average multiples and no longer constitute a headwind.”

Citi Private Bank, on the other hand, cut its global equities allocation to neutral, and raised exposure to high quality bonds, including US investment grade corporate securities.

“We maintain large underweight in global small and medium sized stocks and Europe, while we maintain core high-quality overweight in dividend growers, global pharma, and cyber security,” the CIO office led by David Bailin noted.