According to Lok Yim (pictured), Head of North Asia Private Wealth Management, Deutsche Bank, there was a big shift out of equities into fixed income instruments back in June amongst the bank’s Asian HNW clients. The mentality of Asian HNWIs is quite different to those in Europe. Rightly or wrongly, they tend to make big shifts from one asset to another.
Aside from pulling out of equities, Yim notes that there has been a shift into mutual funds, although given market uncertainty he says clients have also been engaged in short-term trading to profit from volatility provided the liquidity is there.
“At the beginning of 2011 clients’ number one concern was the slowdown in China. There are still headwinds but clients aren’t of the opinion that it’s the end of the world. They just want to know how to manage risk and make money in this environment,” says Yim.
As to where portfolio allocations into fixed income assets are increasing, Yim confirms that a lot of trades have trended towards short-term duration products and local currency products, particularly the CNH: that is, offshore yuan trading in Hong Kong. “Clients have been buying Dim Sum bonds as well as certificates of deposit with 1-year to 18-month maturities. We saw a big jump in fixed income assets between June and August, and continue to see that,” explains Yim.
Although the equity markets continue to whipsaw wildly, Deutsche’s Asian HNWIs remain overweight Emerging Market equities versus developed markets, looking for opportunities in both their home markets as well as Latin America. This would appear to back up a HSBC survey released this week. It found that 59 per cent of Chinese HNWIs and 24 per cent of Singaporean HNWIs plan to invest in Greater China and south east Asian funds and equities over the next six months.
“The sentiment I’m getting from clients is that whilst there are clearly problems in the US, if you look at earnings from a macro risk perspective they prefer US equities versus Europe,” adds Yim.
Unsurprisingly, Asian clients have steered clear of taking bets on the euro or US dollar when it comes to FX allocation. That said, some of Deutsche’s trading clients have taken advantage of currency volatility through the options markets but Yim says that from a general asset allocation perspective “no one is taking big bets. They’re going back into local currencies. We’ve seen trust in the CNH and Singapore dollar,” says Yim.
Appetite for real assets like property, whilst not as strong as in recent times, continues in Asia. This can be understood by the fact that a lot of personal wealth in the region is linked to corporate wealth. UHNWIs own factories and corporations, many of which are doing well this year from a domestic consumption viewpoint. Those buying property are able to do so thanks to their businesses creating cash flow. “There’s incremental money going into real assets but probably not as much, percentage-wise, as before,” says Yim.
One clear trend he’s been seeing this year is less allocation into hedge funds, which clients remain cautious on, but a pick-up in interest in the private equity space. Specifically direct investments as opposed to allocating into large PE funds.
“A lot of clients have their own businesses. If they see an undervalued opportunity related to their own businesses they’re making a direct investment into it. They have the expertise. This also extends to illiquid mezzanine debt with companies doing infrastructure investment. Clients think it’s a great time to get involved. They’re asking us: ‘What are the opportunities out there’?” comments Yim.
He adds: “Asian clients aren’t just saying ‘I want to preserve my capital’. Rather they’re asking: ‘How do I grow my wealth, how do I take market share’?”
Some UHNWIs missed out in ’09 when valuations fell and people made a fortune. Now, says Yim, they have a lot of cash and “ready to go”, emphasising the point that they’re looking globally, but only within industries they understand. This logic also applies to financial assets with Yim confirming that a lot of clients have been looking seriously at the corporate high yield space. “It goes back to my earlier point about seeing a big shift into fixed income. They can see that certain debt has real value.”
One particular two-week window earlier this year when volatility was high saw clients aggressively buying convertible bonds, happy enough to take on illiquid assets because, as Yim points out, “they don’t have Basel III capital constraints”.
Deutsche’s private banking AUM has gone up 28 per cent in Asia since the end of 2009. As of end-July 2011 it stood at EUR32billion.
