As 2019 comes to an end, private banks, asset managers and HNWIs are wondering what the next year will hold in store for clients and investments. Patrick Brusnahan asks experts in the sector about what they expect from the next twelve months.
Stéphane Monier, Lombard Odier
This year offered investors sound returns. For 2020, economic data increasingly suggests that the worst of the economic slowdown may be behind us. Still, we remain in a low-yield, low-growth environment, delivering returns in the low single digits supported by accommodative central bankers.
Resilient portfolio construction is key to every investor’s peace of mind. We have summarised 10 convictions to position a portfolio for the year ahead.
Again, much attention will focus on US politics. Americans elect a president in 2020, and if investors have learned anything in recent years, it is that one man can throw many spanners into political machinery. Ironically then, given the Trump-inspired turmoil of the past three years, markets now are most worried by suggestions that he may be succeeded by Democrat Elizabeth Warren.
Trade is the single issue that has coloured the entire investment landscape. Much hinges on whether, in the final weeks of 2019, negotiations can hint at scrapping tariffs next year. If China and the US cannot settle their dispute before the US presidential elections, and if Trump sidesteps impeachment and then were re-elected, he may even escalate tensions. Markets will react to every development.
The past year was notable for its political unrest. From France, the UK and Iran to Hong Kong, Venezuela and Chile, there is increasing dissatisfaction with political systems and their abilities to manage change. For a range of seemingly unrelated reasons – whether the cost of living, fuel prices, political or climate change – widespread unrest points to easily shared disillusion through social media platforms.
Some of this also looks like a direct result of frustrations with rising inequalities. It is hard to ignore the role of unconventional monetary policy in exacerbating inequalities since the financial crisis. Over the last decade, central banks have helped to stimulate economies and support job growth. However, that also inflated asset prices, with few of the benefits trickling down into real economies. Investors need to follow closely these profound changes in social structures.
Looking ahead to monetary and fiscal policy, Christine Lagarde has just succeeded Mario Draghi at the European Central Bank, and Trump is likely to continue his criticisms of Jerome Powell and the Federal Reserve while pushing two Republican nominees to the board’s vacant seats.
Germany may shake off its aversion to debt with a fiscal package that would boost the eurozone’s fortunes, and China may provide more support to cushion its job market from a slowing economy.
As we prepare for the challenges ahead, it is our pleasure to wish you all a healthy, happy and prosperous 2020.
- Stay diversified and nimble
Investors must pay particular attention to managing a well-diversified and resilient portfolio as we move into 2020. The inevitable surprises will challenge allocations. This means investors must be clear about how they build their exposures, and keep appropriate levels of cash to remain flexible, while keeping their convictions top of mind.
- Shield portfolios
To defend a portfolio’s gains, investors should look at the Japanese yen and put options as well as gold. We prefer the yen to the Swiss franc, as the franc has shown weaker correlations to global risk since 2015.
Spreads on equity indices are a relatively attractive way of hedging a portfolio from a sharp market decline. Finally, if tactically managed, gold can still play a role as a portfolio diversifier, hedging against inflation and volatility – and market fears.
- Identify yield through carry strategies
Traditional fixed income’s low returns now demand a more active approach. Carry strategies, in particular in the high-yield segment, should perform well in this low-yield, moderate-volatility environment.
We also remain overweight in emerging market hard currencies and expect spreads to stay stable. EM growth should improve and China is already showing signs of stabilisation. Credit fundamentals are sound as companies have been conservative in recent years and so globally, EM net leverage is decreasing. Investors should focus on strong credit metrics when picking companies and look at the crossover (BBB/BB) segment.
We prefer to move down the capital structure – into subordinated bonds and hybrids, for example – in fundamentally solid companies, rather than compromising on credit quality. We also like Corporate Sector Purchase Programme-eligible issuers and their substitutes across currencies.
- Focus on equity quality
Pockets of equity quality and growth remain. We expect equities to post positive returns in 2020 with a potential for further market gains if, as seems possible, trade talks progress. Third-quarter results beat low expectations and earnings growth remains weak.
So, although not particularly attractive from a risk-return perspective, guidance for next year is holding up, and valuations should stay supported by accommodative central bank policies. With lower liquidity in global small caps, we prefer larger names in value and growth stocks.
- Equity sectors
With signs that manufacturing is bottoming out, investors should keep an eye on industrial names and balance exposure between defensive and cyclical sectors. The rotation in sector leadership should continue, underlining the importance of this approach.
Specifically, we continue to add to the healthcare and energy sectors, and we remain overweight in information technology. However, with currently high cash levels and risk arbitrage strategies still underinvested, there is a risk that investors will start chasing a rising market in 2020.
- EM equities
We are cautiously upbeat on emerging markets for next year. Brazil is our top pick in Latin America: the country is making a macro policy shifts and a recovery should boost earnings growth. There are opportunities more widely in EM equities, including in China, especially if or when the trade dispute moves towards a resolution, and when, as we expect, the dollar weakens.
- Invest in real assets
Valuations in real assets, whether real estate, private equity, private debt or infrastructure, all look high for the moment, but are supported by low interest rates. It does not look that there is a bubble in these alternative asset classes because prices and fundamentals do not seem disconnected.
While high valuations – much like many other asset classes – make them vulnerable to any sudden shift in sentiment or environment, to some extent they remain insulated by their illiquidity. For eligible euro and Swiss franc investors, real estate remains one of the last asset classes to offer a reasonable return with limited volatility.
- A weaker dollar
2018’s dollar rally and 2019’s resilience is explained by the interplay of trade tensions, the subsequent slowdown in global growth, and the US’ outperformance compared with the rest of the world, thanks mostly to fiscal stimulus.
However, now that data suggests that the global economy is bottoming out and there are early signs of a trade solution, the tail risks are dissipating. This is likely to set the stage for a weaker dollar in 2020. We anticipate EURUSD at 1.15 and USDCHF at 0.97 in the last quarter of 2020.
- Sterling to capitalise on Brexit developments
We expect the Conservatives to win a parliamentary majority in the 12 December general elections, which should allow them to ratify the Withdrawal Agreement and pave the way for trade talks. This would support an undervalued sterling and should price out what is left of the no-deal Brexit premium. We expect GBPUSD to hit 1.35 in Q4 2020.
- EM currencies poised for some upside
Emerging currencies continued to depreciate in 2019, hurt by slowing global trade. A stabilisation in trade, delayed impact from modest Chinese stimulus and significant EM policy easing should encourage an EM growth recovery and support their currencies.
While there is plenty of variation, on the whole, EM currencies look undervalued. Our central scenario points to a 3-4% spot return in JPMorgan’s Emerging Market Currency Index. We favour the Russian rouble, Malaysian ringgit, Peruvian sol and Mexican peso: they are all undervalued, show sound external balances and will likely benefit from idiosyncratic drivers in 2020.
Jürgen Vanhoenacker, Lombard International Assurance
2019 has seen persistent market volatility, growing social and environmental challenges and political uncertainty. Private banks and advisers to HNWIs are under continued pressure to remain profitable and relevant to their clients. According to McKinsey, two-thirds of European banks have experienced flat-line or negative growth in the last five years.
So, what does it takes to stay relevant in the future? In this environment, it has become increasingly important for advisers to HNWIs and their families to understand the changing demographics of modern wealth as it shifts to become more digital, more sustainably minded and more global, while its families become more complex.
In particular, with $30trn to be transferred to women and millennials in the next decade, private banks must ensure that they are able to meet the unique requirements of these individuals in order to future-proof their businesses.
Continuous innovation is crucial in that sense. However, innovation for innovation’s sake is a major pitfall, and advisers must respond to the specific needs of their clients with strategic and meaningful innovation that truly solves their challenges today and into the future.
While 2019 has seen interest in sustainable investing increase across all demographics, the desire to invest in alignment with values is particularly prominent among women and millennials – 95% of millennials and 84% of women express an interest in sustainable investing. Their advisers will need to keep pace with this new demand in order to provide solutions and opportunities that enable their clients to protect their wealth while achieving positive social and environmental impact.
Further, many millennial HNWIs are either digitally native or highly digitally literate, and with this comes new expectations towards their service providers – especially for both a customised digital and tailored personal customer service experience. Already, 62% of millennials want their wealth management platforms to actively use social media channels. With millennial wealth estimated to reach $24trn in 2020, wealth advisers will need to continue innovating and adapting to address the changing demands of modern wealth.
As the face of wealth diversifies, so do family dynamics. Managing the sensitivities and requirements of more complex family structures will be an important component of advisory services. Today’s family model is far less traditional, with fewer first-time marriages, an increase in divorces, same-sex marriages, and the dispersal of families across the globe. This greater level of complexity will require advisers to deliver strategies that are adaptable but still ensure that the holders’ wishes for succession and legacy planning are fulfilled.
Beyond specific demographics, wealth continues to globalise. More and more families are internationally mobile: 36% of wealthy individuals hold a second passport, and 48% of them are sending their children abroad to university, according to the latest Wealth Report from Knight Frank. Listening to individual needs and having the global expertise to provide unique, tailored solutions to match their internationally mobile lifestyles will be crucial for wealth advisers as their clients’ lives and interests are increasingly multi-jurisdictional.
To remain relevant and effective in 2020, private banks and the advisers to wealthy individuals will need to invest in really understanding these changing, nuanced needs of their clients, and deliver service excellence throughout their value chain: whether it is when supporting them to invest sustainably, innovating to offer enhanced digital capabilities, or providing the expertise and sensitivity to support globally mobile lifestyles and complex family dynamics.
Víctor Allende, CaixaBank
Recently, the great challenge facing the sector has been directly linked to the 2018 introduction of the European directive MIFID II, which develops new models of independent and non-independent advisory, enhancing transparency and investor protection. In this sense, future customers will demand, among others, greater cost transparency, which will create great differences between those with value-added advisory services and those without.
Big data and artificial intelligence will continue to play a key role in wealth management innovation, with sophisticated algorithms and modelling allowing for greater service-customisation. This is today used in tailoring investment solutions to match clients’ risk appetite, but its biggest potential lies in the delivery of more traditional services that rely on a deep understanding of individual circumstances and needs, such as inter-generational wealth transfers, succession planning and other life events.
For HNW families and individuals, this approach does not replace the value-adding role of an independent adviser, but complements it by giving the wealth managers of the future new tools to support and inform their advisory function. It is also contributing to a further professionalisation of the wealth management function, allowing the performance of wider tasks with the added benefit of giving a more bespoke feel.
For affluent clients just starting their wealth-creation journey, regardless of the demographic, the adoption of technology will continue apace. Clients are becoming more digitally proficient and require access to more sophisticated tools and services. So-called robo-advisory solutions that blend investment solutions with tailored offerings that take into account clients’ evolving personal and financial needs will continue to become more sophisticated and will help increase the size of the wealth management industry. CaixaBank’s Smart Money robo-adviser service attracted nearly €1bn ($1.1bn) in AuM in just over a year since its launch.
That being said, a human touch will always be necessary in all client interactions, especially with affluent customers who tend to demand a wider range of value-added services. In fact, although one of the key objectives of CaixaBank’s strategic plan 2019-2021 is to accelerate digital transformation, the transformation of the physical network to provide higher added value and the best customer service is equally a priority.
With the ongoing adoption of new technologies, branches will start to play a completely different role in the future. Physical branches continue to have an important role in terms of proximity, accessibility, but they are evolving into advisory and added-value hubs, a place where clients expect to be listened to, understood and taken care of by the best advisory professionals.
In this sense, far from being disrupted by technology, the wealth management industry can capitalise on the rise of technology through faster client acquisition, onboarding and servicing. This will free up more time and resources for bespoke and personalised client advisory services, and discretionary wealth management, creating a virtuous cycle of client service efficiency and high-quality advice as the cornerstones of a successful wealth management business.
Finally, one major trend that is going to grow in the coming years is what we call social-value-proposal. Clients are no longer only asking about the profitability of their investments from the financial point of view, but they also demand social commitment. They look for banks that help them channel their philanthropic projects, as part of a global service.
The CaixaBank Private Banking Social Value Project helps clients identify their own philanthropic project and find the most efficient way to make it happen, with specific and measurable results.
Caroline Burkart, Scorpio Partnership
As we look ahead to 2020, what does the landscape for UK wealth firms look like? Here we review the key developments and challenges we are seeing across the industry as we go into next year.
Slowing market growth
Overall growth has slowed. The last year for which there is full data, 2018, shows that year-on-year there was a 6% decrease in UK wealth and 3.3% decrease in the HNWI population, taking the UK HNWI population to 556,160 with assets of $2trn.
Aside from these headline numbers, it is fair to say that the industry – in common with most sectors – is undergoing a constant evolution, as new economic realities become established and new technology develops. However, the industry is taking time to adapt and evolve to keep up with the pace of change.
Investment in technology and compliance
Technology is an area taking up considerable budget as firms adopt new digital platforms across their operations from front to back office.
Investing in new technology is essential to future-proof the business – but is also a challenge at a time when profitability and margins are on a downward trajectory.
For clients, the digital experience is now a key determiner of how they view their provider, and for many HNW clients, our research shows that the digital experience in wealth is still not up to the standard of other industries that clients interact with daily. Wealth managers are clinging to the value of the one-to-one relationship, yet clients want a hybrid approach, where technology augments rather than replaces the relationship.
Firms have also been forced to manage the range of new regulations introduced over the last decade, and they have reported significantly increased budget and people allocations in this area as they adopt and enable new procedures.
Demonstrating better value to clients
Clients are inevitably taking a keener interest in fees and charges, encouraged by new regulations around transparency such as MiFiD II.
This is also highlighted by new market entrants, which are unencumbered by legacy business models and are therefore able to be more flexible and innovative with their fee structures. Clients are therefore developing new expectations from the wealth industry in terms of fee transparency and value for money. The industry needs to get much better at demonstrating its value to its clients by ensuring that the right level of service is directed at the right client segment. If firms can better understand the client experience they deliver, they have a better chance of adjusting this for changing market conditions.
In line with this, there are signs of increased interest in measuring the client experience and client journey, as firms look to see how they can increase their client-centricity to improve their overall client satisfaction.
Battle for talent
Changes in the industry are also feeding through to the workforce, in terms of attracting and retaining the right talent. However, it is not only a question of getting the right talent at the right price, but also in the context of managing cost-income ratios effectively, of managing individual productivity, and hiring staff who are truly client-centric.
Attracting new clients
The three areas highlighted so far are all more internal factors, but wealth management is an industry where the client is key. In this regard, we see three central challenges:
First, clients expect more control or influence over their investments and wealth relationships. In part this is influenced by technology and the ease with which business can be conducted in other sectors. In our work with HNW clients, they always cite companies known for their digital approach as examples for wealth to follow.
Secondly, there is the need to attract new clients, specifically from income-generating client segments and to have a differentiated offer, as the marketplace is crowded. Regarding the timing of new client acquisition, in the past most new wealth relationships were started in the 1940s, but now the process of acquiring new clients needs to happen earlier as our research points to a changing wealth journey.
Thirdly, it is essential to meet the product and service expectations of the next generation: it should reflect the values of younger clients who favour investments such as ESG funds and alternatives.
But above all, our research continues to show that clients still look to their wealth firm for advice. They want guidance and support, so although firms need to build and maintain a proposition that responds to all these new challenges, they must continue to deliver the very high levels of client service and care that their clients demand.
Yousafa Hazara, Irwin Mitchell
With Boris Johnson’s snap election to push through a hard Brexit, the big worry for HNWIs is what the landscape would like under a Labour government.
For those individuals with connections and investments in the UK, careful planning will be even more essential to organise transactions and structure investments to ensure optimum tax efficiency.
The most dramatic force of change continues to be the global drive for transparency. Governments are increasingly focused on cross-border arrangements and structures, and have implemented regulatory schemes that require the exchange of tax-related information. The Registration of Overseas Entities Bill is scheduled to come into force in 2021, with the aim to improve transparency regarding the ownership of land in the UK. The bill seeks to create a publicly accessible register of beneficial ownership of all overseas entities that own land, or are purchasing land in the UK.
Details of who owns and controls overseas companies and other legal entities that own UK land will be kept at Companies House. Since 2017, trustees of UK and non-UK trusts which incur a UK tax liability have been obliged to register certain information with HMRC on the Trust Registration Service (TRS). This reflects the governments’ obligations under the Fourth Anti-Money Laundering Directive.
The scope of the TRS will be significantly widened by the Fifth Anti-Money Laundering Directive (5MLD), which is expected to be implemented by the UK on 10 January 2020. The government consulted on how 5MLD will be transposed into UK law; the consultation closed on 10 June 2019 and the government has yet to publish the report.
The most significant reform will be that any express trust – irrespective of value or any UK tax liability – will need to be registered with the TRS. This appears to include trusts made in informal or domestic situations – for example, recording ownership of a home held jointly which may technically constitute a trust – charitable trusts, bare trusts and trusts of life insurance policies.
Alessandro Tonchia, Finantix
As we enter a new decade, clients know the type of customer experience they want to generate. But they are getting to the point where they say: “All of this is great, but I don’t have enough data, or the right data.”
So, you have this tension between the drive for personalisation and meaningful advice, and a dearth of data that can focus on those decisions and personalisation. Certainly, one crucial task over the next year will be to fill those containers of data.
Because, with that data, you can have client intelligence and also compliance intelligence. You have a better-fitting suitability model that not only supplies intelligence, but can produce tailored proposals to the client and react to certain events, based on explicit or implicit client preference.
So, a rich data model and data collection will allow you to automate as much as possible in any level of service you are aspiring to. AI also has immense potential. There are two areas in particular where we envisage more change in this space.
Firstly, around client intelligence and using AI to discover more around things such as events. In addition, using AI to support extreme personalisation.
For this, it is important to understand client needs, build a wholesome client profile and configure work around this, with sophisticated personalisation about risk preferences, investments and so on. There is not one technology that is going to change the way private banks interact.
However, to be disruptive in 2020 will mean to be client-centric. Incumbents will have to show and deliver client services, and show a stronger focus on the customer. Client acquisition, personalisation and portfolios that are in line with the beliefs of the customer are all key trends that I believe will be pertinent for the wealth management industry in 2020.
Fahad Kamal, Kleinwort Hambros
Global economies are slowing, buffeted by powerful headwinds. Manufacturing remains mired in contraction, dragged down by rising global trade worries. Export-oriented economies in Japan and Germany are particularly vulnerable. Even in the US, where manufacturing remains in better shape, a lack of clarity on trade and other policies continues to stymie corporate capital expenditure and profits.
Admittedly, services – the dominant sector for most advanced countries – remains in expansion across much of the world, underpinned by robust personal consumption, strong real wage growth and low unemployment. But consumer data tends to be a lagging indicator, not a leading one. Add to the above elevated valuations for equities, a bull run entering an 11th year and myriad geopolitical quagmires, and you arrive at the conventional view that one should eschew risk, be prudent and bank the accrued gains. That view is likely wrong.
Firstly, GDP growth is still positive across all major economies, including Germany and Japan. Neither the International Monetary Fund nor any major central bank expects a recession in any notable country.
Even as the ‘expansion’ stage of the business cycle has undoubtedly drifted into ‘slowdown’, slowdowns can last for years. More importantly, history shows that risk assets such as equities outperform defensive assets such as investment-grade bonds in slowdowns. ‘Contractions’ – or recessions – should be avoided like the plague from a perspective of risk assets, but we are not in a contraction!
Secondly, the monetary policy cavalry has once again ridden out in force to pre-empt the current deceleration in growth and inflation from worsening, which should help keep us in slowdown mode. If monetary policymakers will also be joined by their fiscal counterparts, conditions may even tick back into expansion! But even just monetary policy alone will do at least one thing: keep rates low. This gives us some comfort on elevated equity valuations.
Thirdly, while equity valuations are not cheap, the asset class is in strong momentum. Indeed, far from new equity market highs being a bearish signal, they are bullish, with new highs often begetting new highs. The trend is a far more powerful indicator than the ‘age of the bull market’ or similar notions.
Finally, geopolitics. The Brexit drama is just beginning in many ways in 2020 – future terms remain to be discussed – and a US election is likely to be a bruising, even disturbing, affair. But data does not support the hypothesis that geopolitical tensions are bad for markets.
Anecdotally, the FTSE 100 is up 34% (i.e. 9% annualised) since 22 June 2016, the day before the Brexit vote in total return terms (i.e. including dividends). The US market is up 55% (i.e. 16% annualised) in the three years since the Trump election.
We have analysed a battery of geopolitical dislocations in history – overwhelmingly, they tend not to matter to returns in the months and years ahead, and are best ignored. We remain sanguine and constructive on risk positions.
Ross Jennings, RBC Wealth Management
We expect the next year to see a continuation of long-term shifts in the wealth management landscape, some of which are not unlike those we are seeing in the banking and finance industry more generally.
Operationally, greater integration of technology to improve the client experience will continue to be a key focus for wealth management firms. This is with a view not only to respond to the demands of a younger, always-on client base, but also to augment the role of relationship managers to give them the tools to better service clients, regardless of where they are.
Continued demographic diversification in the client base is another key trend that the industry will need to continue to adjust to. The pace of wealth accumulation among millennials and women of all generations will continue to increase as a result of the boom in tech-driven innovation, and this creates significant demand for wealth management advice and wealth-preservation strategies, presenting a significant opportunity for wealth managers who can offer bespoke wealth management services to meet their needs, as well as, in turn, diversify their own workforce to be better aligned with the changing client demographics.
Another trend concerns the fact that life expectancy continues to increase, and families will find three – and in some instances, even four – generations alive at the same time, with newer members becoming successful entrepreneurs in their own right. Against this backdrop, independent advice and the ability to manage and represent often diverse interests while preserving the family’s legacy will require wealth managers to create structures that help families navigate that complexity in an environment that fosters collaboration between the different generations.
From a client perspective, I believe there will be continued momentum throughout 2020 towards increasingly incorporating ESG factors into portfolios, with the aim to both protect and enhance returns for the long term. From an investment perspective, the industry’s biggest challenge and opportunity in 2020 will be to navigate the macroeconomic environment which continues to be categorised as ‘uncharted territory’.
We expect central banks’ 2019 accommodative monetary policies, as well as some additional fiscal stimulus, to keep most developed economies growing through 2020 and probably longer, continuing to support growth in corporate earnings, dividends and buybacks, though wealth managers should be cautious of inflationary pressures on over-exposure to stocks. A well balanced global investment portfolio should help clients avoid complacency.
Furthermore, continued persistence of low interest rates means the search for yield becomes even more important, with clients increasingly hungry for insights and ideas that will help them deploy capital effectively. Wealth managers who are part of large global universal banks and thus have relationships across public and private capital markets will have an opportunity to become even more relevant to their clients in 2020.