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April 18, 2018updated 26 Jan 2022 3:11pm

Ways to prepare HNW investors for sudden volatility in 2018

By Ronan Mccaughey

After years of calm, volatility returned to global markets in early 2018. Amid increased levels of uncertainty – ranging from monetary tightening and ongoing Brexit negotiations, to the US’s tougher stance on trade, the Syria crisis and escalating tensions with Russia – the onus is on wealth managers to ensure investors’ portfolios are prepared for any possibility. Client engagement will be key to ensuring investors do not jump ship if markets turn sour. Ronan McCaughey explains

HNW investors in Asia-Pacific are significantly more risk averse than their global peers, with an average equity allocation of 27% – compared to 39% globally – according to GlobalData Financial Services.

This is one of the key findings in the report HNW Asset Allocation Trends 2018, which is available at GlobalData Financial Services.

Other key findings from the report include:

  • 47% of wealth managers expect demand for alternatives to rise, while 22% expect a drop in demand. The asset class is becoming more popular as a diversifier and as the allure of bonds fades
  • 70% of wealth managers agree that HNW investors are increasingly open to new investment ideas. Unfortunately, increased levels of uncertainty are holding investors back

While equities have been growing strongly since the end of the financial crisis, GlobalData says market observers will struggle to find an asset class that has performed as abysmally as commodities, even when factoring in the recent rebound.

As of January 16, 2018 the 10-year annual return of the S&P GSCI Total Return Index was -9.9%. This is a dreadful performance, even more so as the average was significantly boosted by an 8.6% increase in 2017.

Yet the upswing has been sufficient to entice investors back into commodities, as they are betting on the upward trend continuing.

ETFs are also becoming increasingly popular. ETF assets under management reached $4.84tn worldwide at the end of 2017 – a growth rate of 36.3% over the previous year. In comparison, global hedge fund assets grew by only 6.4% in 2017.

Overall, GlobalData Financial Services explains that uncertainty has become a key theme when it comes to investors’ short- to medium-term asset allocation strategies.

Data from GlobalData’s 2017 Global Wealth Managers Survey shows that investors are taking a step back to wait for things to clear up.

The report says: “We do not expect any pronounced changes in asset class allocations in the short term. The only exception to this is alternative investments, where we forecast a slight increase in demand over the coming year as investors look for new means to diversify their portfolios.”

 

J.P. Morgan Private Bank’s Spring Investment Barometer underlines investor uncertainty too with 75% of UHNW investors believe the US could begin its next recession within two years.

When exploring the potential for US interest rate hikes, 47%of investors in  J.P. Morgan Private Bank’s Spring Investment Barometer 47% said they expect to see an additional rate rise from the US Federal Reserve this year, following Jerome Powell’s first hike in March 2018.

Anders Nysteen, a quantitative analyst at Saxo Bank says it is important in this environment to have a portfolio not just with “soft” assets, but to be prepared for sudden market changes with a more diversified portfolio including some of the “hard” assets such as commodities, real estate, and emerging market exposure.

Nysteen says: “With the current slightly negative credit impulse and highly indebted financial system, minor events could trigger increased uncertainty in the market, leading to a further expansion of the corporate spreads. A potential trade war between the US and China could increase the risk premium in credit markets. This would trigger a slowdown in the economy as companies would face higher financing costs.

“Saxo Bank’s forecast is that credit spreads will widen and the yearly change in gold prices will stay positive. However, the consensus is looking for credit spreads to remain low and not expanding much while inflation will pick up.”

 

Critical success factors for HNW asset allocation

  • Push for rebalancing strategies: Wealth managers need to prepare clients’ portfolios for a rise in volatility to avoid increased churns rates, given that return on investment (ROI) constitutes one of the top means of client retention

 

  • Place greater emphasis on client engagement: With uncertainty on the rise, providers must place greater emphasis on education to ensure clients understand the effects external forces have on portfolio performance.

 

  • Adapt to local market conditions: Wealth managers with global reach should lead with localized strategies to align their service propositions to diverse regional investment preferences.

Source: GlobalData Financial Services

 

 

 

 

 

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