As each year begins, every private bank is expected to carry out the ritual of delivering its market outlook for the year.
While Lombard Odier’s Asia CIO Jean-Louis Nakamura says the track record of these calls is ‘limited at best’ – thanks to the complexity of the data and pressure to make headline- catching, non-consensus calls – they can help to identify multi-year themes catching the attention of investment teams.
First, let’s look at the trends shaping investments this year. As the largest equity market and the world’s leading economy, the US is on everyone’s mind. Tax breaks from the government and quantitative tightening by the Federal Reserve are already influencing some investors’ allocations to equities and bonds.
Credit Suisse Private Banking believes that 2018 will see rising corporate capital expenditure, especially in manufacturing, technology, transport and warehousing, and utilities.
Like its peers, the bank expects increased mergers and acquisition activity, as well as share buybacks in light of the Trump administration’s tax cuts.
‘As Europe is lagging in the cycle, its potential for external growth and share buybacks is at least as good as in the US,’ BNP Paribas Wealth Management says in its 2018 outlook report.
It’s also a good time to be in Asia. If private bank outlooks are anything to go by, Asian equities are the place to be in 2018, backed by booming economies, strong earnings forecasts and cheaper valuations than developed markets.
UBS Wealth Management, the largest wealth manager in the region, is optimistic on Asian assets, expecting inflation to accelerate modestly by between 0.5% and 1% this year. It also foresees Asian central banks gradually lifting policy rates.
Good morning, Vietnam!
One of UBS’ central investment themes in Asia is Vietnam. The country is Asia’s new dragon, a March note by UBS analyst Carl Berrisford proclaimed, supported by strong macro indicators, liquidity and an earnings growth forecast of 22%.
‘The strong pipeline of new listings bodes well for fresh allocations available to foreign investors – a trend that has helped drive up the VNI [Vietnam Stock Index],’ he says.
His theme pick for the next decade, however, is more predictable – China. The holy trinity of Hong Kong as a global trade and financial centre, Macau as a tourism and entertainment centre and Shenzhen as a technology hub has won China a place in most investment heat maps around the world.
Add to that the manufacturing potential of Guangdong and the Guangdong-Hong Kong-Macau Greater Bay Area (GBA) can become a globally competitive, metropolis through greater integration and better resource allocation, Berrisford adds.
‘We expect the region to achieve significant economic growth over the next five to 10 years and we see a number of attractive investments from the GBA proposal,’ he says.
East meets west
HSBC Private Banking is one of the many banks excited about China’s One Belt One Road initiative (BRI), set to link the east and west and create multiple investment opportunities along its ‘corridors’.
The BRI will connect about 4 billion people and is expected to create new demand for real estate, trading and logistics companies in Asia.
‘We see investment opportunities in equities and bonds of Chinese and Asian infrastructure, construction, building materials and equipment companies,’ says Patrick Ho, HSBC Private Banking’s Asia investment strategist.
‘Select financial institutions should benefit from increasing cross-border financing activities exposed to BRI projects and urbanisation.’
Infrastructure investment along the China-Pakistan Economic Corridor is estimated to cost around $40 billion, plus a further $77 billion in the Association of Southeast Asian Nations, according to DBS Private Bank.
Infrastructure and urbanisation will be strong themes for the rest of Asia. In India, 500 million people are expected to move to urban areas over the next 40 years.
To meet their needs, massive spending of around $130 billion will be needed in infrastructure and telecommunications by 2025, BNP Paribas estimates.
Transport is a key part of this infrastructure investment and wealth managers are starting to find opportunities in the future of mobility, such as electric vehicles.
Materials, industry, consumption and technology are all part of that theme, with electronic component makers and software companies likely to benefit.
Tech takes off
This takes us to technology and disruptive trends – eSports, e-commerce, robotics, artificial intelligence, telecommunications, automation, cybersecurity – and back to China.
Citi Private Bank and Deutsche Bank Wealth Management, like most other banks, are putting their weight behind this digital revolution.
‘After we highlighted the potential investment implications of the robotics revolution in Outlook 2017, related equities rose 69.4%.
If innovation in automation can drive outsized demand for robotics, history would suggest that outperformance can persist for more than a year,’ Citi said in its 2018 outlook.
However, as investors pile into technology-related investments in Asia, Standard Chartered Private Bank is cautious, viewing any sign of a slowdown as a risk.
‘As the technology sector accounts for 33% of the MSCI Asia ex Japan, any weakness in the sector could negatively affect investor sentiment,’ the wealth management advisory team said, commenting on one of its preferred asset classes for 2018.
Staying in technology, the digital healthcare story is equally important for some banks, with the elderly population in Asia projected to reach 923 million by 2050.
Julius Baer believes China’s innovative domestic pharmaceutical companies, leading drug distributors and medical device manufacturers, as well as experienced private hospitals, will benefit from this structural growth trend.
At the other end of the demographic spectrum, Chinese and Indian millennials are being counted among the most important consumers for the global market. Indeed, many of the trends private banks have identified are being driven by millennial tastes and consumption patterns.
Most importantly for private banks, millennials are the next generation of clients. In its outlook for 2018, Credit Suisse named a few topics that these clients are talking about that are expected to shape the investments carried out by the private bank on their behalf.
Energy efficiency, education, affordable housing and technology featured in many of the conversations, but, more importantly, so did sustainable consumables – those produced in a socially and environmentally responsible way.
Private banks in Asia are beginning to realise that many millennials want to invest differently from their parents and grandparents. As a result, environmental, social and corporate governance-related investments and funds are slowly but surely making their way into product suites in the region, alongside traditional and alternative asset classes.
Volatility will come and go, markets will wobble (or lurch) upwards and downwards. Some will get it right, several will get it wrong, but private banks are betting on these long-term trends and themes to guide their clients in the next decade.
This article originally appeared in a supplement published with the March edition of Citywire Private Wealth magazine.