Benjamin Cavalli, head of Wealth Management Asia Pacific, Credit Suisse shares his views with Asian Private Banker in ‘The Final Word’, a year in review by the region’s private banking leaders as they share their thoughts and opinions on key issues around industry trends, investments, regulations, and technology in 2021, as well as providing their predictions for 2022.
The previous 12 months have proved that private banks can draw in significant amounts of net new assets and client accounts as the industry has adapted to widespread travel restriction due to COVID-19. With the potential easing of these restrictions in 2022, new variants aside, to what extent will private banks return to their pre-pandemic methods of sourcing clients and gathering assets?
Being a digital-ready bank, we have been well-prepared for all kinds of scenarios, and have continued to serve clients and pursue prospects. In the past two years, our omni-channel approach has helped us deliver consistent client experiences by addressing client needs through the channels of their choice. The adoption rate for our digital private banking (DPB) platform is over 80% and we have seen a surge in the use of high-touch interactions over chat platforms such as WhatsApp and WeChat, and video conferencing solutions like Zoom.
We saw an exceptionally high volume of trades executed digitally, with more than half the equity trades from our private banking clients placed via DPB. We kept the traditional RM channels available, but also invested even more in a hybrid wealth management service model with Direct to Client delivery of content and advice, and digital trading and self-service capabilities.
We believe certain trends will continue. We need to be able to understand and respond to clients’ needs so that we can continue serving them anytime and anywhere. It is imperative that we are able to deliver actionable, timely, personalised content and advice: differentiating thematic investment solutions as well as proactive and predictive trade advice. We must remain compliant and transparent, and yet be able to move fast and adapt in order to cultivate long lasting trust.
Given the majority of Asian wealth is located onshore, how should international private banks best target and differentiate themselves in these markets? For domestic regional private banks, what is the most effective strategy for competing with international players?
We are obsessed about onshoring and this continues to be a top priority for our wealth management activities in Asia. There are tremendous wealth opportunities in this region and we want to be in the right places to capture growth especially in wealth accumulation, which is rising faster in Asia than in any other region. It is equally important for us to access onshore wealth across Asia due to its varied and at times complex regulatory and business environment in different markets.
We have been rigorously expanding our regional footprint into onshore markets over the years and now have the most diversified onshore and offshore footprint in the industry. This positions us well to capture opportunities in the region.
As testament to our strategy, we have built highly successful onshore businesses over the last 10 years in the largest wealth markets of the region, beyond our Hong Kong and Singapore regional wealth hubs. Since 2017, we have expanded our onshore wealth management services to cover Australia, India, Japan, and Thailand. We also serve clients based in Indonesia, Malaysia, the Philippines and Taiwan through our international hubs.
A key focus for us is to continue to strengthen our position as the “Bank for Entrepreneurs” and deliver solutions that are tailored to what clients want, across both private banking and investment banking. We will keep evaluating opportunities to make the most of our well-established investment banking footprint across the region, where it has a decades-long history in most markets, which is a key differentiator in our onshore strategy.
The last 12 months have been volatile for investors in China, from the meltdown in the high-yield bond sector to regulatory actions targeting sectors such as technology. How are you advising clients to invest in the world’s second-biggest economy in 2022?
We believe it is still too early to buy into China. We need to see concrete signs of economic recovery and policy easing. While the 50 bp RRR cut in December does represent an easing of the stringent policy stance thus far, a genuine recovery in Chinese risk assets will require a fairly forceful policy shift.
It remains to be seen if this will indeed come to pass. The risk from pressure in the property sector has not yet abated. At the same time, regulatory pressure in the technology sector remains. We have yet to see forward earnings revised higher, regulatory uncertainty fade, or funds flows return. As such, we do not think that there is sufficient justification to increase our exposure to Chinese equities at this juncture.
We prefer investing into Sustainable China and other policy-supported sectors while maintaining a strategic allocation in Chinese equities.
What will be the key investment themes that shape both global markets and those in the region in 2022 and how is that feeding into how you advise clients?
Relatively more attractive investment opportunities can be found in Asian markets. Improving valuations in Asia in 2021 were driven by strong earnings growth of 40%.
As demand for technology products normalises alongside related supply chains, it is likely that the technology sector will experience an earnings contraction. And even though we anticipate stronger earnings growth from Southeast Asia as tourism recovers, the MSCI Asia ex-Japan is likely to generate just 8% earnings for 2022.
Attractive opportunities lie in the thematic sphere. For example, our “Sustainable China” basket, which captures opportunities in a number of China’s policy-supported sectors, is exposed to opportunities in sectors such as renewable energy, electric vehicles, 5G and semiconductors. Our “Beautiful Europe” investment theme is designed to take advantage of demand for luxury goods among Chinese consumers and the pricing power of luxury goods producers in Europe. We prefer equity markets with a cyclical tilt including Japan, as we expect the Japanese machinery, electric appliances, and transportation equipment sectors to benefit from the post-pandemic global recovery.
Fixed income investors will experience challenging conditions in 2022. As inflation moderates and bond yields rise, real rates should improve, but generating positive returns in fixed income will still be difficult. Hence, we are overweight senior loans. They benefit from rising interest rates, and are already offering an attractive yield of 5.5%, which compares well with 4.4% in US high yields. In terms of fundamentals, the US senior loan default rate continues to improve and should remain low in 2022 considering recent rating upgrades.
In Asia, we prefer the non-China property segment of the Asia high yield (HY) complex. This market segment accounts for around 60% of total Asia HY credit and should benefit from strong growth in both South and Southeast Asia in 2022, where policy normalisation is likely to be gradual.
Asia HY ex-China property is surprisingly healthy at the fundamental level, with a sharp improvement in the default rate (from 12.7% in 2020 to just 2.3% in 2021), in stark contrast to the roughly 30% in the China property segment. Specifically, we favour short duration (one to three years) BB-rated bonds, as these offer yields that compare favourably with the equivalent US HY segment.
In alternative investments, real estate should still benefit from the low interest rate environment, as well as the continuing economic recovery. The economic backdrop remains supportive for private markets as well, while hedge funds should deliver modest returns close to the historical average.
One of the most-repeated views over 2021 was that the ‘60/40’ portfolio is dead, given the ultra-low to negative yields offered in many parts of the sovereign bond markets. From alternatives to commodities to private credit, how are you helping investors to allocate assets in what was traditionally the fixed income part of their portfolios?
Finding investment strategies to compensate for low investment income from bonds is a difficult task. However, this does not mean that investors necessarily need to take on more risk to achieve their return targets – if suitable, they can and should consider other trade-offs such as liquidity. Investing in private assets too can provide attractive risk adjusted returns for investors willing to accept more reduced liquidity.
Private asset investing can offer an alternative to bond portfolios through vehicles such as private credit, for example, to equities, via PE or access to asset classes such as real estate that are difficult to access otherwise. At Credit Suisse, we have developed a fully diversified offering within this space for clients looking to diversify their traditional public market securities.
Sustainability is higher up the agenda for investors than ever, with last year’s United Nations COP26 event underscoring the scale of effort needed to achieve global net zero emissions by the middle of this century. How are you helping your clients to remove ESG risk from their portfolios and embrace sustainability in their investment strategy?
Growing public awareness of the economic impact of the climate crisis, biodiversity loss and the wide-scale disruption caused by COVID-19 has accelerated interest in sustainable investing worldwide.
Purpose-driven companies are not only focusing on the sustainability of their ESG and operational processes and policies, but are increasingly exploring the positive impact of their products on society, and the degree to which these products are directly helping achieve societal objectives. Investors are seeking exposure to those companies that are demonstrating this transition. They want to align their portfolios with impactful companies and seek investment returns from fast-growing themes aligned to the UN Sustainable Development Goals (SDG), such as education technology, financial inclusion, green technology, and healthcare.
We believe banks and financial institutions are important agents for change. We are committed to playing our part in achieving a more sustainable global economy by engaging with clients, bringing them with us on our journey, and innovating to create sustainable investing solutions that achieve clients’ preferences and goals, alongside our own.
To give investors more insights into investment trends, we hold an annual Supertrends conference, outlining multi-year societal trends aligned with the United Nations’ SDG to provide clients with a simple and transparent framework to prioritise their investments according to their purpose, be it climate action or in healthcare.
Our Sustainable Investment Framework focuses on how we apply ESG criteria and create transparency for clients. We aim to deliver solutions ranging from ESG strategies or exclusions and integration, through to thematic/impact-aligned and impact investing — all seeking to ‘generate returns sustainably’ and focus on the market rate of return for the given opportunity. We believe that we can positively affect society and the environment, while generating market-rate or higher returns.
In addition, we have created a bespoke Sustainable Activities Framework that defines the methodology governing eligible activities that qualify as sustainable. Our goal is to deliver a robust and credible framework to define Green, Transition and Social financing, and to encourage clients to consider these factors when engaging with us.
Together with a robust and innovative sustainable product offering, we aim to integrate sustainability reporting into our standard investment reporting, increase transparency on clients’ portfolio sustainability profile, enabling clients to make better-informed investment decisions and helping them align their investments with their personal values.
The past two years or so have accelerated the rate of technological and digital adoption at private banks across the region, given the restrictions imposed by the COVID-19 pandemic. From hyper-personalisation to digital onboarding and KYC, what will be the biggest focus in terms of tech deployment for the industry in 2022 and where do the gaps lie?
We see client experience and data capabilities as two critical drivers of success in the new age. Our technology and platform strategy puts the client at the centre, with three key objectives: ‘empower’, ‘connect’, and ‘protect’.
With ‘empower’, we ask: “what does wealth advice look like in the age of Amazon and Netflix?” We have been making significant investments to be able to deliver direct-to-client, actionable and holistic advice, investment ideas, and product content, in a relevant, personalised and timely manner. Due to the ever-growing amount and complexity of content and data, the only way to approach this challenge is with technology. For example, using advanced data analytics and machine learning models, we can draw on the strength of our house view content, research insights, and market events, to deliver personalised and actionable investment ideas, sustainability offerings, take-profit/loss alerts, portfolio quality reports, etc, to clients. We believe the real opportunity is in being able to offer a flexible hybrid service model, responding to clients’ needs and preferences.
In terms of ‘connect’, digitalisation has become the new normal for clients and for us. To service clients anytime and anywhere, we keep investing in an omni-channel client experience. CS Chat and Digital Private Bank (DPB) are our award-winning digital solutions, used by clients and RMs for secure messaging and collaboration, portfolio and investment insights, research, news, trading, and other self-service capabilities. Furthermore, we are investing in building connectivity with the wider ecosystem, to respond to clients’ needs, and secure our ability to accelerate organic and non-organic opportunities with intermediaries, new onshore markets, new client segments, and develop new monetisation opportunities. As an organisation, we actively participate in the wealth ecosystem through partnerships and collaborations.
With ‘protect’, we consider compliance as a competitive advantage. Transparency and adherence to regulation are crucial to building lasting relationships and trust with clients. We are investing in advanced RegTech capabilities across AML, KYC, customer protection, and regulatory and tax reporting. These capabilities allow us to adapt quickly to changing regulations and focus on improving client and RM experience. One notable example for us is iSAP, a technology platform we designed and built in-house to address the complex set of investment suitability processes across the client lifecycle — from the client’s investment profile, through to product due diligence, suitability and cross-border rules, pricing, as well as the automation of personalised pre-trade risk disclosures. With such technology, we are able to move and adapt faster, with full transparency across the advisory journey. We can now unlock exciting opportunities, such as direct-to-client advisory at scale, combining content with advanced analytics and predictive machine learning models to offer personalised insights and actionable advice to clients – while being fully transparent and compliant.
Meet 2021’s industry leaders in the full round up of of Asian Private Banker‘s The Final Word 2021.
