The report highlighted how HNW and UHNW entrepreneurs and families often hold more cash than they're comfortable with; many are positive on equities, but are concerned about inflation pressures and tax.
Inflation, market volatility and a changing tax environment are top worries for high net worth and ultra-HNW entrepreneurs around the world. Equities have topped US and European entrepreneurs’ portfolio allocations for the third year in a row, with Asia investors increasing exposures, a new report said.
BNP Paribas Wealth Management, in its 2021 Global Entrepreneur and Family Report, said its study of almost 1,000 entrepreneurs and multi-generational families also found that “smart technology," portfolio diversification and energy transition are the most promising investment themes for this year. The report, carried out by Aon in January and February 2021, took views from people in 19 countries, with average investible assets of more than $17 million.
Rising inflation has spooked some investors, prompting worries that it is not simply caused by the pandemic’s interruption of supplies, but may be more systemic, particularly given the scale of government debt and central bank money printing, aka quantitative easing. In the US, the annual inflation rate for the world’s largest economy rose to 5 per cent from 4.2 per cent and was above economists’ forecasts (source: Trading Economics). Measures of prices also show gains in countries such as the UK, for example.
The BNP Paribas report found that 38 per cent of its respondents think inflation is a serious risk: it is ranked as the number one concern of the investment climate overall, both in Europe and the Gulf Co-operation Council collection of Middle East states. In the US, continued stock market volatility is more worrying to respondents.
In Asia, investors fret about high levels of corporate debt (39 per cent). Changing taxes and regulations vex 36 per cent of UHNW entrepreneurs, it found.
Inflation is clearly a worry to some investors, but concerns are probably exaggerated, Edmund Shing, global chief investment officer BNP Paribas Wealth Management, said. Some forces at work linked to the pandemic will unwind, with the inflation rate in the US, for example, is coming off. “I think the inflation scare is somewhat overdue,” he said.
Even so, several senior BNP Paribas figures briefing journalists and others about the report made a point about how areas such as listed equities, real estate and infrastructure did offer protection against inflation.
Price pressures are a particular concern for investors in certain countries. “Runaway price inflation is particularly troubling to entrepreneurs based in emerging economies (such as Poland, 72 per cent; and Indonesia, 58 per cent) and those with volatile currencies, including Turkey (84 per cent) and Brazil (52 per cent).
Private and public
The report’s authors made much of the continued interest by wealthy individuals in private market assets; 53 per cent of UHNW entrepreneurs, for example, increased their allocations to private equity over the last year. Real estate was also an attractive option during the pandemic, it said.
“Equity and private equity are two growth asset classes where entrepreneurs have clearly gone for growth in their portfolio allocations. This has proved to be the correct choice in hindsight with very strong performance both from the listed equity markets and private equity funds, from the lows seen in March 2020 up until today," Shing said. “Many investors have been cautious about the commercial real estate asset class. But we would argue that a positive orientation towards real estate is certainly warranted. Not only has real estate outperformed global equity markets since 2001 on average, but it also tends to outperform following recession, which is our current environment now.”
The firm was asked about the trillions of dollars of uncommitted capital in the private markets' space – so-called “dry powder” – and whether this posed a problem of oversupply. “We don’t see it as a particular concern and see it as showing the popularity of the asset class,” Richard Clarke-Jervoise, global head of private equity and private debt for BNP Paribas Wealth Management, said. (A report in April this year by Preqin, the research firm, showed that in the US, dry powder as of September 2020 stood at $976 billion, less than a third (32.5 per cent) of the total $3.0 trillion in assets under management, below a 10-year average.)
“There are some of the sensationalist headlines around it [dry powder] and it is not something that gives us particular cause for concern,” Clarke-Jervoise continued.
Globally, one in three enhanced their portfolio commitment to either private equity funds (35 per cent) or direct private equity deals (34 per cent) during the crisis. Conversely, about just one in six cut their commitment over the course of 2020 – overwhelmingly because they found the pandemic-related risks and macroeconomic uncertainty too great. With UHNW entrepreneurs, 45 per cent of them increased allocations to direct private equity deals and 39 per cent increased them to private equity funds.
"Private equity investors are not short-term. They are driven by a long-term vision as direct or indirect equity shareholders. This asset class was very resilient in 2020, experiencing much lower volatility than public markets. Patient capital is ideally suited for such kinds of uncertain periods," Claire Roborel de Climens, global head of private and alternative investments at BNP Paribas Wealth Management, said.
The study found that equities and owned businesses remained in joint first place in their financial portfolios, each accounting for 19 per cent of investable assets. Some 53 per cent increased their portfolio allocations in stocks over the last 12 months – especially in Asia-Pacific.
Although there are some variations across countries, these are not as wide-ranging as previous years. At the top end, equities comprise between roughly a quarter and a fifth of portfolio allocations: for example, in Taiwan (26 per cent), Italy (24 per cent), Spain and the UK (22 per cent each) and Brazil (23 per cent). What does stand out is that in two regions – the US and Europe – equities have now supplanted entrepreneurs' own business as the preferred asset class for three years in a row. The exceptions to this in Europe are France and Poland: the only two markets in the region where allocations to own business are higher than equities (21 per cent and 22 per cent respectively).
The study found that Millennial entrepreneurs are twice as likely as Baby Boomers to think they are holding excess cash. However, in many regions, a cash “buffer” is important for injecting capital into their businesses or other private investments.
In Asia-Pacific, 29 per cent say they would like to hold more cash than they do now. But, globally, 71 per cent would reduce their cash position if negative interest rates were brought in, as in countries such as Switzerland. Some 31 per cent of entrepreneurs have cut cash holdings during the pandemic. Some 25 per cent of global entrepreneurs think their cash position is excessive.
Chips on the menu
The study also found that 82 per cent of respondents think enabling “smart technology” is an important investment theme for 2021, with areas such as artificial intelligence. Some 32 per cent of respondents are opting for growth strategies to plug into an anticipated post-COVID recovery.
Globally, 82 per cent of respondents want to integrate smart technology into their businesses or make it a focus of their investments. In fact, 45 per cent are already acting on this theme. Entrepreneurs in Brazil (64 per cent), Poland (68 per cent), Turkey (60 per cent), Switzerland (58 per cent) and the Netherlands (56 per cent) are most likely to be already acting.
This technology investment trend explains why silicon chips and the equipment to support computers and networks will be in hot demand, BNP Paribas said.
This news service asked BNP Paribas whether the silicon chip sector faced a problem if mainland China put further pressure on Taiwan, a major chip-making country. This is a reason for increased tensions between Beijing and Washington.
“There’s no doubt that geopolitical tensions between the US and China will increase,” Shing said. China is already increasing its chip-making capacity, and the US is “nearshoring” chip making as a strategic policy objective. “This [issue] links to inflation. The more of this nearshoring we get, the more this adds to some inflation pressures in time.”