As we usher in 2021 and with it a new decade, the pursuit for stability and growth continue. In these rapidly evolving times, the ability to pin-point the next avenue for growth, wealth creation or even disruption would be somewhat of a challenge for even the most savviest of investors. Hence, to better understand what trends could shape 2021 and the years ahead, Global Private Banker interviewed Prashant Bhayani, CIO Asia, BNP Paribas Wealth Management Asia. This interview covers his insights and commentary on macro-economic themes, global markets, the portfolio for the new decade and impact investing.
Macro-economic indicators: Vaccine roll-out and policy accommodation will shape 2021
The two key macro-economic indicators will be the pace of vaccine roll-out and efficacy. This would potentially allow gradual re-opening and faster economic recovery than countries that do not. The other critical indicator is the level of policy accommodation. In that regard, real yields remain negative in the developed world. This year, BNP Paribas Wealth Management grouped its themes by investment horizon, from short term to long term. The first theme, titled ‘Vaccines, recovery, and reflation’, focuses on assets that should be the first to recover in the cyclical turnaround that we anticipate over the coming months. Examples are early-cycle sectors, selected commodities and commodity currencies. Meanwhile, while reflation will gradually take place, the market will likely be concerned that the economic recovery will also push inflation higher in the medium term.
Medium term themes include how to find income in a yield starved world: ‘Low volatility absolute return’. Examples of this being alternative UCITS, absolute bond funds and structured products. ‘Sniffing out yield truffles’, another medium term theme focuses on corporate and Emerging Market bonds, infrastructure funds and real estate. The biggest challenge which still remains, is how to create a 60/40 portfolio. For this we emphasize on new sources of alpha such as asset diversification through selected commodities, currencies, US inflation-indexed bonds, alternative UCITS and private equity.
Geopolitics: Continuation of policy indicates to a short-term impasse
The Biden administration is focused domestically on vaccine roll-outs and the U.S economy, primarily passing a stimulus package. Focus is also on infrastructure and research & development. On China, there is not tangible action yet. However, increased use of global multi-lateral institutions – WHO/WTO etc. and partnering with allies in Europe and Asia were noted in the early days. This is an important difference from the Trump administration. The views on China are bipartisan, hence strategic competition in sensitive areas will likely continue. No changes to tariffs (yet), national security issues, or technology areas have been noted. Additionally, Europe also views China as a competitor. Hence, cooperation is possible in areas of shared interests like climate change.
Asset Allocation: Non-US equities, bonds and gold remain favourites
Historically low real rates are currently supporting equity valuations. We remain positive on equities as an asset class. We are overweight on Non-US equities – Emerging Markets, Japan, UK, and Europe. We are positive on Emerging Markets, based on a superior earnings growth profile and room for further re-valuation. Preference for China and Taiwan, and the more cyclical Japanese exposure. We remain positive on these pro-cyclical sectors as well as small-mid caps in line with the reflation theme.
Central banks will remain accommodative this year. Both the Fed and the ECB have no intention to raise policy rates. We stay positive on Emerging Markets bonds, Investment Grade and fallen angels corporate bonds, and selected Asia high yield. We also like peripheral bonds and see any spread widening as an opportunity to reinforce positions. We continue to see a weaker dollar, especially with the passing of additional US fiscal stimulus looking imminent. Simultaneously, we continue to like gold. With real interest rates at negative levels, USD weakness and inflation fears (gold is a natural inflation hedge) should bring gold prices up in 2021.
Investments: A positive market rally, generational influences and smart technologies will guide the new decade
Markets: Firstly, the positive impact from vaccinations should accelerate over the next few months, allowing for a progressive re-opening of the consumer economy. Furthermore, this combined with savings rates, which are double digit in the US, Europe, and Asia means a consumption recovery is possible. As majority of U.S companies continue to beat their earnings forecast, key support for equities continues. Our medium-term equity market view remains resolutely positive, with the potential for double-digit gains over 2021. However, in the very short term the risk of a small market correction could be expected, hence we will look to accumulate equities on any market dips.
Investment for the new decade: For the longer-term themes and megatrends in our 2021 investment strategy, we have divided them into two groups. The first group focuses on China’s opening of capital markets and economic reform which includes China A-Shares, technology sector, onshore bonds. The group also includes other megatrends such as ‘New consumption habits in a post-lockdown world’ such as home-based consumption, home entertainment/activities, ‘Shifting generational influences” focusing on nutrition, housing, medical care etc and ‘Enablers of smart technologies’ which includes artificial intelligence, big data, cybersecurity etc.
The second group addresses ESG themes, such as technological innovation, equipment and storage for renewable energies and investing in trust and profitability especially as the world embarks longer term plans to effectively reduce carbon footprint.
Private Equity and Real Estate are in the spotlight: Private equity and real estate will have the highest expected return of any asset class over the next cycle. The illiquidity premium has delivered over equities especially for managers that can add value. For example, there is more than a trillion dollars of dry powder among private equity and real estate firms. As we anticipate increasing corporate defaults due to the impact of the recession, this will translate into excellent hunting ground for attractive acquisitions. Furthermore, there is a demand for $6.3 trillion infrastructure spending in the medium term that cannot be funded fully by indebted governments alone. Hence, we favour private infrastructure funds – a critical backbone of the economy, because of their high cash generation and inflation adjusted revenues.
Impact Investing: The transition to a end-to-end investment experience could define this decade
Global transition to an better future: This is by far the most significant megatrend for this decade. 2020 was the biggest year for inflows (US$194 billion) to sustainable strategies. Assets in sustainable funds hit a record US$1.65 trillion dollars. Europe leading with the largest flows, followed by US and Asia. Furthermore, bonds related to ESG issuance passed the US$500 billion mark for the first time in history in 2020. Moreover, ESG focused strategies outperformed in general and the pandemic has reinforced trends benefitting sustainability.
Contributing to ESG: BNP Paribas Wealth Management’s client-facing staff take a mandatory training on sustainable investing. Further, more than 25 sustainability related events are organized each year where clients can learn more about sustainability and how they can have a positive environment and social impact with their wealth. BNP Paribas recently launched an online questionnaire for clients to identify their preferences on the 17 UN Sustainable Development Goals. This was undertaken to enable the bank to provide its clients with tailor-made sustainable investments solutions. BNP Paribas Wealth Management believes in employing ESG investing principles to their overall top-to-bottom investment philosophy.