Shifting sands for HNW investors

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May 19, 2019
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CONTRIBUTED ARTICLE

It wasn’t all that long ago that high net worth investors focused their investment efforts towards hedge funds, stocks and private equity but now, it’s personal.

The shift to investing in more socially conscious ventures, such as those specifically targeting climate change and renewable energy, as well as cybersecurity and evolving business models, has never been more pronounced.

What’s driving this change in sentiment, and just how fruitful will it be for this highly discerning market?

The raft of economic and political challenges confronting both Australia and indeed the rest of the world, appear set to intensify over the coming 12 months and beyond.

Locally, the continuing decline in the residential property market, economic growth forecasts and the likelihood of yet another change in government have collectively forced investors, including the HNWs, to safeguard their portfolios and source more resilient and diverse opportunities where risk and reward are measurable.

BT Private Wealth’s High Net Worth Investor Sentiment Indicator for Q1 2019 highlights the point that this group of investors has adopted a more defensive strategy with sentiment continuing to weaken across both equities and property.

HNWs have ongoing concerns around Australian economic growth, in particular. The January 2019 labour market data was strong (approximately 40,000 new jobs created), however wage price numbers showed an increase of just 2.3 per cent year on year. This shows that despite the strong headline employment numbers, wage price growth remains suppressed and any improvement is likely to be gradual.

In global terms, the outlook isn’t quite as unnerving, but not altogether promising either. The start of 2019 saw US equity markets continue to climb higher recovering much of their losses from the fourth quarter of 2018, due to optimism surrounding the US-China trade agreement, along with declining fears of tighter monetary policy from the Federal Reserve. Across the Atlantic, enduring frustrations surrounding a delayed Brexit deal between the UK and Europe are only serving to fuel trade tensions and subsequently, negatively impact markets.

So what are the opportunities that are piquing the interest of the HNW cohort of investors?

Riding the tech wave  

We are watching with interest as 5G has become the enabling super infrastructure and arguably, the most pivotal point for the global drive to dominate the next wave of technological developments. And with linkage between the progress of 5G to data integrity and security, the technology remains an intriguing investment theme for HNWs.

As 5G will enable a wide number of technological advancements in areas such as progressive health technology, autonomous vehicles, smart phones, smart cities, and virtual and augmented reality, the integrity – perceived or otherwise – of the infrastructure is paramount. Fortunately, for investors, this infrastructure will take some time to develop, and establish principles of how data integrity is ensured.

The challenge surrounding how the explosion in data and analysis can be governed in a way to guarantee privacy is also critical, especially in areas of health advancement.

The widely-held sentiment that cybersecurity requirements are already challenging for companies will be further tested with 5G. There will therefore be a multi-fold increase in cloud security demands for an increasing number of companies and industries.

As the promise of reshaping services and industries due to the advancement of 5G-enabled technologies continues, only simultaneous advancement in proper 5G infrastructure, data principles and security can provide a foundation of trust and therefore change the lives of people in a positive way through these advancements.

Clean energy gathers pace

The price and availability of renewable energy sources are fuelling a global energy transformation, and investors are taking notice. With mounting pressure on jurisdictions like Australia to devise well-informed energy policies, many believe it’s only a matter of time before a more sustainable future is achievable.

Energy efficiency and renewable energy are the main pillars of this energy transition. Renewable energy is expected to be the fastest-growing energy source, accounting for 40 per cent of the increase in primary energy. By 2040, the energy mix is expected to be the most diversified the world has ever seen.

Rising carbon prices, coupled with continued regulation supporting a shift to lower carbon energy, has allowed renewable energy to increasingly compete with other sources of energy. The expansion in renewable energy is expected to be broad-based, with China and increasingly other parts of the developing world taking over from the EU as the main engine of growth. China is expected to be the powerhouse, adding more renewable energy than the entire OECD combined, with India becoming the second largest source of growth by 2030. While different paths can mitigate climate change, renewable energy and energy efficiency provide the optimal pathway to deliver the majority of the emission cuts needed at the necessary speed. Together they can provide 90 per cent of the energy-related CO2 required emission reductions, using technologies that are safe, reliable, affordable and widely available.

Business model remodel

Technological innovation, regulation, competition and changing consumer preferences have combined to reinvent the structure and application of business models. The constitution of business models within particular market segments, such as e-finance, logistics and technology, have already caught the attention of HNWs, having remained largely unchanged for some 20 years.

Broad asset prices peak with a divide between sound and less sound assets, with industry theme, business model and sector durability becoming key for active risk awareness at a time when Australia is entering a new phase of progress.

Business models benefiting from Asian consumption and service trends have supportive multi-year fundamentals, and of late, their share price valuations have significantly adjusted downwards. However, their risk-reward has improved given their lower equity valuation premium.

A focus on quality and sustainability of growth becomes pivotal. Sectors showing reasonable valuations with sound and improving fundamentals may provide more value. Businesses who showcase particular attributes, such as stable gross margins, exceptional management teams, and who invest in their ability to adapt to innovation and change, are likely to remain sound and therefore able to differentiate themselves further overtime.

From a sector perspective, the domestic banking, real estate and consumer discretionary sectors have now entered a more mature phase. But for HNWs, growth opportunities await in industries such as technology, food and healthcare.

Time will tell as to whether looking beyond the traditional to the emerging will pay dividends.

HNWI at a glance

The Q1 High Net Worth Investor Sentiment report is based on responses received from 125 HNWIs The Investor Sentiment Index is on a -50 to +50 scale where -50 is strongly pessimistic, +50 is strongly optimistic and 0 is neutral.

Investor sentiment among HNWs remains weak at 4.8 compared to 7.2 in Q4 2018.

Investor sentiment towards equities has dropped to 0.2 down from 1.1 in Q4 last year, off the back of concerns around economic growth, global trade wars and political uncertainty

Property sentiment continues to fall at -31.1 compared to -21.6 in Q4, driven by concerns around negative gearing and ongoing weakness in property prices

59.8 per cent of HNWI’s expect the Australian economy to slow down, with 67.2 per cent HNWI’s expecting residential property to perform worse in the next quarter, up from 58.5 per cent in the fourth quarter

While the overall HNWI sentiment is weaker compared to the previous quarter, the large majority (74.4 per cent) feel financially secure. Interestingly, one in three are more likely to invest in Australian equities in the next quarter

Three in five HNWs think the economy will grow at a slower rate in the next quarter, up from 51.5 per cent in Q4, while less than one in seven think it will speed up

Half of HNWIs are sticking with the banks post the royal commission, with 40.5 per cent believing the royal commission will change their saving and investment intention, up from 33.4 per cent in Q4. Interestingly, close to half of HNWIs are currently invested in banks and other financial services companies and intend to hold current exposures or increase their allocation to these investments.

About the author: Elissa Crowther-Pal is Head of Wealth Services at BT Private Wealth including Westpac Private Bank, St George Private and Bank of Melbourne Private. 

The original article was published in FS Private Wealth: https://www.fsprivatewealth.com.au/blogs/view/shifting-sands-for-hnw-investors-136563058