Equity is set to be a key asset for private banking and wealth management in 2021. What are the experts saying? Patrick Brusnahan and Hannah Wright examine the industry and what it’s saying.

Jeffrey Sacks, head, EMEA Investment Strategy, Citi Private Bank

We expect 2021 in private banking to be a strong year for risk assets particularly equity in which we are significantly overweight. Fixed income will face a much tougher environment as valuation support is weak after very strong performance over recent years. The USD is likely to weaken further.

Past equity in 2021, what does private banking have in store?

Three uncertainties are now moving in clear positive directions:

Firstly, there has been significant vaccine progress, which is likely to continue in the first quarter. As production, distribution and vaccination are ramped up, we expect lockdowns to ease and mobility to increase significantly by the middle of next year.

Secondly, the US election transition process is now reasonably smooth. The remaining outstanding issue, the Senate composition, will be resolved by early January. We expect a Republican Senate majority.

Thirdly, policy support is accommodative and ongoing, from both governments and central banks. Crucially the US is expected to agree and pass its next emergency fiscal support programme during the first quarter. The ECB and Federal Reserve are likely to continue with their bond buying and cheap loan programs, increasing them if needed.

These factors are going to support the new economic cycle. We are expecting 4.2% global growth next year. As there are not likely to be surges to inflation, central banks are expected to keep rates at current levels while they continue aiming for their 2% inflation targets.

Our 2021 Outlook includes three themes:

  1. Reversion to the mean: We expect that the assets that lead the recovery in 2021 will be different from those that performed best during the pandemic. This is especially relevant for equities, where we are recommending cyclicals, value, and mid-caps. In addition it is a good time for portfolios to increasingly diversify in non-US equities, especially in Asia and also in Europe, UK and Latam.
  2. Financial repression: Central bank actions have driven bond yields down to unprecedented low levels. High grade bonds only offer decent yields on a selective basis, and sovereign bonds are mostly expensive so don’t offer their traditional ‘safe haven’ attractions. Some areas of fixed income like high yield and emerging markets continue to offer decent risk-reward, however need to be supplemented through high dividend paying and high dividend growing equities. We also suggest using volatility to generate decent coupons in structured products.
  3. Unstoppable Trends – we focus on four which have very strong drivers and are at tipping points in terms of offering large universes of investable opportunities:
  • Greening the world. Alternative energy is being increasingly prioritized by government and the costs of e.g. solar energy are falling rapidly.
  • Hyperconnectivity. We focus mainly on the investment opportunities afforded by 5G, in terms of companies making efficiency gains, as well as producers of hardware and software.
  • G2 World. Gives emphasis to the long-term growth and development of China, driven by government support and a rising middle class.
  • Longevity. Even as the pandemic eases, the healthcare sector should continue to benefit from demographic and technology trends that are enabling us to live longer lives.

Steve Brice, Chief Investment Strategist, Standard Chartered Wealth Management

After such a tumultuous 2020, what does 2021 hold for us? We believe there are four major factors that will determine the private banking outlook in 2021 for equity markets: the distribution of vaccines, the outlook for government and central bank policies, the extent to which government bond yields will (be allowed to) rise and the performance of the US dollar. On balance, we think these factors will continue to fuel the ongoing recovery of the global economy, equity markets and income-generating assets.

The news on the vaccine front looks positive. The UK has already approved one vaccine and the US and Euro area look set to follow suit shortly. Of course, there are logistical challenges to producing and distributing the vaccines on a sufficient scale, especially as the initially-approved vaccine needs to be stored at -70C. However, we believe in the power of human ingenuity to resolve these issues, which means we should be able to put this pandemic behind us in 2021.

While the vaccines are gradually rolled out, governments and central banks are likely to continue doing everything in their power to sustain the economic recovery and ward off the development of a credit default cycle. This means additional fiscal packages and continued debt monetisation, in all but name, in the coming months. These measures should keep bond yields capped and drive the US dollar weaker still.

What does this mean for investors? Human beings, by nature, are generally a skittish bunch. We almost have to be worried about something – and when we are not, it is usually a time we should be worried. Towards the end of March, it was the looming recession and the perceived impending collapse of the economy. Today, in the aftermath of the spectacular recovery since then, it is the worry that markets have risen too quickly, pushing valuations to stratospheric levels.

Acknowledging these biases in the first step to making an investment plan. These fears are natural and play a role in ensuring we do not fall too much in love with romantic stories about the next BIG thing. However, they should not get in the way of making a plan.

In 2018/2019, we advised clients who were starting out on their investment journey to try and envision how they would want their portfolio to look like in three years. The next step – always the hardest part – was to start slowly accelerating investments should there be significant market correction. Those who followed that plan assiduously, would be very happy today. However, human nature means that fears likely dominated when markets were collapsing and this led people to freeze, or at least invest less than their plan would have suggested.

So what should investors do now? Our view is that we are in a relatively early stage of a long-term equity bull market. There is still plenty of excess capacity in the global economy, which means inflationary pressures are likely to be generally muted, allowing central banks to continue focusing on supporting growth rather than fighting inflation.

Meanwhile, for 2021 itself outside equity in private banking, a weaker US dollar is likely to be a strong tailwind for investors. Historically, a weak USD environment has been very positive for asset class returns pretty much across the board.

For example, since 1999, when the US dollar has weakened 5-10% over a 12-month period, global equities have averaged a 14% annual return and have delivered positive yearly returns

83% of the time. This compares to an average 0.4% return and 56% hit rate, respectively, where the US dollar has strengthened 5-10%. A similar profile can be seen when looking at returns for bonds and gold.

In our opinion, the stage of the economic cycle and the US dollar’s outlook both mean investors should be less wary when it comes to increasing investment allocations in 2021. A year ago, spare capacity was very limited and central banks were increasingly focused on making sure inflation would not take off, which raised the risk of overdoing it and inducing a recession. Today, we are past that recession already and we believe there are bluer skies ahead.

Of course, investor concern over the elevated level of equity market valuations – such as price-to-earnings or price-to-book ratios – is valid. It is possible that equity markets have moved ahead of fundamentals to some extent, making them vulnerable to intermittent pullbacks, especially if the recovery of those fundamentals turns out to be slower than expected.

However, investors are faced with high valuations almost everywhere they look. Deposit rates and bond yields are mostly below the level of inflation – meaning that we are losing our purchasing power. To us, this means investors looking to preserve and grow their wealth will increasingly be forced to look to riskier asset classes, such as equities, bonds issued by companies with lower credit quality and other alternatives such as real estate.

While we cannot rule out short-term equity market pullbacks, we believe such reversals are likely to be less severe and relatively short-lived, given the policymakers backstop. Against this backdrop, we believe avoiding an all-or-nothing investment approach will be critical to one’s long-term success. Drip-feeding investments in a planned way into a diversified basket of financial and alternative assets may feel boring, but boring can be good if it gets you started. A systematic approach to investing would also reduce the risk of panic selling in the face of short-term market fluctuations.

Of course, it means that you may wish you had invested more or less, but at least you will have skin in the game already if the market has gone up, and still have more cash to deploy at cheaper levels if the market has fallen. These are easier emotions to deal with than being 100% wrong by staying out of the market and watching your hard-earned savings being gradually depleted by inflation.

Schuyler Weiss, CEO, Alpian

Disruption is a term that is often used too quickly when it comes to banking, but no one can argue the fact that 2020 has brought seismic changes which have reshaped how we see our finances and how they are managed. The private banking sector has been thrust into the digital age and cutting-edge technology is enabling clients to interact with their bank or wealth manager more easily than they ever have before. However, technology alone is not enough – banks must combine the support of human advisors with technological innovation. Getting this balance right will be key to success for emerging digital-first innovators and traditional players alike.

Technology is also opening the door to private banking services for a group of people who were previously priced out. As those in this mass affluent segment look ahead to what they want to achieve in 2021, a banking service which offers tailored advice that is easily accessible will be key to helping them not only grow their wealth but allow them to focus on that which is truly important, whether that’s more time spent with family or making that career move they always dreamed of. 2020 has seen many people reassess their values and it is now the role of private banks and wealth managers to ensure that our services truly reflect those values.