There is no doubt that the past few years have been incredibly unpredictable. The uncertainty caused by pandemic lockdowns and, more recently, the war in Ukraine has impacted not only how investments have performed in some markets but also how investors wish to invest.
Ultra High Net Worth Individuals (UHNWI) have also changed the way they protect and grow their money, and Laurence Mandrile-Aguirre, Citi Private Bank General Market Manager for Switzerland and Monaco, believes some of these investment trends are here to stay.
"Right after the COVID-19 recovery began, the war in Ukraine started – and for European investors it was something happening very close to home, so it affected the behaviour of clients," she says.
"They became more cautious. On one hand, they were ready to move forward past the pandemic, but the new geopolitical concerns and the escalation in Ukraine led to a few new investment trends. Reducing exposure to risky assets is certainly one; de-leveraging because the immediate effect of this war was to trigger new concerns around the risk of recessions and inflation, especially in Europe, which has put investment on hold."
"They became more cautious. On one hand, they were ready to move forward past the pandemic, but the new geopolitical concerns and the escalation in Ukraine led to a few new trends."
"Equity trading slowed down and sometimes investors just moved to cash and waited for more clarity, instead of trying to trade the market with short term views on sectors or stocks."
Many paused their plans to see how long the conflict would last, and the resulting issues around energy and food supply chains across Europe have led some investors to look at increasing exposure to commodities as a hedge to the challenging environment.
In the past year, former safe havens such as gold, cash or mandated US treasuries have not performed as they would have previously.
"The US dollar, for those in different reference currencies across the EMEA (Europe, the Middle East and Africa) region, has been one of the best macro hedge as it went up 10 per cent and clients have been looking for ways to make sure they shelter their portfolios against higher rates and inflation hedges," Laurence adds.
Investing with impact
There is no doubt the tangible effects of climate change across the EMEA area have also influenced investment choices. "The heatwaves that we’ve seen across the northern hemisphere have exemplified concerns around global warming with our clients," she says.
"They are concerned about it because if you think about EMEA, the Middle East already had very hot temperatures and in Europe we have been really raising the issue of global warming supported by scientific reports and making it a key topic on agendas in everything from climate specific conferences to economic gatherings."
Laurence has also noticed the desire to invest with purpose is certainly growing. "There are a few interesting investable solutions on impact investing, anything around renewable energy, climate, diversity and wellbeing is definitely of interest to investors," she says.
"By 2050, renewable energies will supply 44 per cent of US electricity needs – currently it’s 21 per cent so there will be lots of investment required to produce renewable energies, and there are lots of initiatives with governments or in tangible actions."
"ESG and impact investing is here to stay. In a lot of the conversations we have with clients, the topic comes up.
There hasn’t been the same progress in terms of helping with the taxonomy defining the challenges around social engagement, but environmental, social and corporate governance (ESG) investment is certainly proving popular going forward.
"Our clients are very often engaged in philanthropy themselves, on topics that are close to their values and hearts, where they try to have impact on a specific topic. But what we witness now is that from a broader investment perspective, there is more engagement, interest, and a clear need for more awareness on some specific topics. When we do portfolio reviews, clients are very curious to understand how their portfolios relate to the UN’s Sustainable Development Goals, especially on the social side," Laurence shares. The Pandemic and war in Europe have brought to light how the three concepts behind E, S and G are ultimately connected.
"We’ve seen a lot of progress in terms of measuring the sensitivity of client’s portfolios or the exposure to these themes. They are asking for ways to contribute. What we witness now is that from a broader investment perspective, there is more engagement, interest, and a clear need for more awareness on some specific topics. But more work needs to be done when it comes to taxonomy and impact measurement as well as defining how investment should be designed to attract massive inflows of private capital into social considerations."
Informing and engaging with the wealthy
Citi Private Bank realises this growth area is also one where bringing thought leadership and analytical tools to investors is key, as is providing guidance in this emerging and establishing market, bringing together the public and private sector and the flow of capital from UHNWI into impact investing.
Investors are keen to invest in Education as a social theme, either online (edtech) or through innovative ways that can help overcome the impediment to quality education in some emerging markets where access to it, is limited. Especially when it comes to girls who are often marginalised. Citi Private Bank aspires to play a key role in terms of delivering content, insight and bringing investment opportunities to clients who have the wealth and would like to participate," Laurence explains. "I think financial institutions play a key role in attracting private capital from wealthy individuals into these global efforts."
"We have a taxonomy newly defined in Europe, that’s very helpful because it reduces confusion for investors and it allows us to bring the right solutions to raise money and accelerate progress."
This year, the framework and track record around environmental issues has certainly been established, but there is still work to do around social issues.
So where will UHNWI be putting their money in the coming year? Laurence says, "ESG and impact investing is here to stay. In a lot of the conversations we have with clients, the topic comes up."
And within the sector, Laurence believes concessional blended finance – where public money and private money combine in a defined framework – will grow.
"We are highly committed to be a key player when it comes to delivering content and insight as well as bringing investment opportunities to clients who have the wealth and would like to participate."
"We play a role in terms of delivering content, insight and bringing investment opportunities to clients who have the wealth and would like to participate."
Asset allocation will return in response to central bank interest rate increases. Some clients had reduced fixed income exposure to very low levels.
"Yields are back and that opens up a lot of possibilities for investors. They are likely to rebuild their exposure to fixed income and alternative investments. A year ago you couldn’t get exposure to equities and preserve the capital," she says. Higher yields combined with higher levels of volatility create a favourable environment for capital markets and hedge funds.
Whether investors’ appetite will return to Chinese equities again is unclear but it looks likely that digital technology, cyber security and food security industries will also all attract interest and investment.
"After any crisis, usually new investments themes open up for private equity managers to capture opportunities when there is some market dislocation," Laurence says.
"We’ve had COVID-19, the war in Ukraine, recession risks, inflation and all the sector dislocation in energy and agriculture. I’m sure that will probably open the door for a good vintage of returns for private equity."
About Laurence Mandrile-Aguirre
Laurence Mandrile-Aguirre is General Market Manager for Citi Private Bank Switzerland and Monaco, overseeing the delivery of private banking services to ultra-high net worth individuals and family offices.