In a recent event organized by Inversión magazine on the topic of “Investments in Private Banking”, representatives of local and international private banks, and of major international fund managers, discussed the best investment options in 2023 being recommended by major investors.
After the market debacle of 2022, a year in which, unusually, there was a high correlation between fixed income and equities because both asset categories fell sharply at the same time, the beginning of 2023 has been favorable for investments, especially in fixed income.
The experts talked about the impact of this rise in fixed income on the portfolios of private banking clients, as well as the growing weight of assets with little correlation to traditional financial markets, such as private assets or alternative investments. These assets are consolidating their position as one of the preferred investments for the highest net worth individuals.
The experts discussed whether 2023 could be a more stable year for private banking clients, with better returns than the horrendous year of 2022. Most agreed that in these market phases, the winners are assets with little or no correlation with fixed income and equities. However, this comes at the cost of lower liquidity and very high minimum investment limits, which fits the profile of this segment of investors very well.
Within the spectrum of private assets, the experts drew attention to sustainable investment, a wave that private banking clients are riding thanks to strong support from national and international governments and regulators. Nevertheless, the benefits of investing with a purpose are not yet generally perceived by clients, beyond reaching milestones such as the Energy Transition that will allow us to reach 2050 with net zero emissions, and other objectives included in the UN Sustainable Development Goals (SDGs).
In summary, the experts agreed that the current market scenario in 2023 could be beneficial overall for investors, albeit with certain caveats and conditions.
View of private banks: 2023: a year to improve the risk/return ratio
Private banking firms always work with a focus on outperforming real returns with no risk (interest rates minus inflation). To do so, they provide a long-term vision adapted to each client’s risk profile, investment preferences and time horizon. Their ultimate goal is to beat inflation in the economy and markets at any time, preserve their clients’ wealth and bring them peace of mind in the long term.
The current rally in fixed income favors them. This is because, thanks to the current high bond coupons, the more conservative, and therefore more risk-decorrelated part of portfolios is generating higher returns for investors.
Private bankers believe that diversifying is necessary to take better advantage of the opportunities presented by fixed income in 2023. Whether it is issues with different ratings, high yield and investment grade, or different fixed income assets: corporate bonds, government bonds, buy & watch funds and buy & hold funds that provide yields to maturity (3-4 years) with IRRs between 3%-4%. Private bankers believe that now is the time to efficiently manage the performance of the medium-term leg of the yield curve.
It is also the time for diversified portfolios with a greater weight of fixed income because investors can access higher returns with lower risk, something that is happening for the first time after 13 long years of negative real rates.
Very high liquidity is seen by private banks as a factor that will drive investor appetite in 2023. And the return to the usual decorrelation between fixed income and equities will make it easier for clients to once again demand traditional private banking services that generate added value for them, such as portfolio building, financial planning or active management.
The way 2023 began has convinced private bankers that it is going to be a year for active management, because the current scenario can help bring Alpha into portfolios. And it will also be a year to include in portfolios other assets with low correlation with traditional assets and good return prospects with controlled risk, such as private equity, infrastructure, or alternative investments. Assets that help optimize the risk/return ratio.
As for equities, private banking firms anticipate a 2023 with more episodes of volatility – we have just seen this with the bankruptcy and rescue of Silicon Valley Bank – although the outlook for assets in general is favorable. Because they are resting on a cycle that is holding up better than expected, and on the fact that during the course of the year, the famous monetary pivot will arrive, which will bring a change in trend from restrictive to expansive monetary policy.
Therefore, as in fixed income, the focus should be on the medium term if the investor wants to achieve real positive returns. Decorrelation, active management, and the search for real assets and thematic investments will dominate the investment landscape in 2023.
Management vision: Active management will provide value in a scenario with more investment options
Some of the largest international asset managers with a presence in Spain set their sights on the opportunities that may arise, depending on the expected environment for 2023. Like the private banks, they believe that active management will play a leading role because 80% of a portfolio’s performance comes from asset allocation. And the product universe has grown very significantly, especially with private assets, mega-trends and sustainable investment.
In fixed income, the managers believe that the rate hikes have left a scenario of attractive levels for government debt with higher credit quality, namely, investment grade. By geographical area, in the United States they are opting for short-term debt, and in Europe for debt with a slightly longer duration.
Where asset managers also believe that value lies in credit, especially companies with healthy balance sheets that are withstanding the cycle better. And in emerging debt in countries that have raised rates, because they provide very attractive returns.
The impact of the uncertainties in the economy leads them to be cautious with high yield debt. Therefore, to take advantage of opportunities it is time for active and flexible management, a useful tool to identify the potential in government debt, credit, credit ratings, durations and geographic zones.
The managers were also cautious about the best approach for investing in equities in 2023. Because it is not yet known where the ceiling of interest rate hikes really lies. So this is going to be a year for value investing in solid, quality companies that pay high dividends. And by geographical areas, Europe and emerging markets are better than the overvalued United States.
The asset management experts also stressed that 2023 will be a year to invest in mega-trends, private assets and sustainable investments.
Megatrends such as the energy transition, which experts say has only just begun; the circular economy (products are recycled, reused and shared rather than discarded); technology as a tool that makes the economy more efficient; and population growth. Some managers also pointed to the return of consumption growth in China as significant in the short term.
With respect to the potential of private assets, the managers agreed with the private banks that these bring diversification to the portfolio (the number of unlisted companies exceeds the number of listed companies in the world by seven times), lower levels of liquidity, while they require high minimum investments, despite the fact that the regulator in Spain has lowered the minimum capital to 10,000 euros. However, only investors capable of assuming such levels of liquidity and who understand the risk will gamble on this asset class. Where they see the greatest potential is in
Lastly, on the subject of sustainable investment, which is so fashionable lately, the international managers were somewhat skeptical. This is because over-regulation has confused the industry rather than benefiting it, making it difficult to make decisions. In any case, the managers see a way forward in 2023 with some assets, such as green hydrogen, which will be essential for the net zero emissions milestone in 2050; sustainable infrastructures such as water or clean energy; and social infrastructures.