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BNPP Wealth: take more risk in 2020

Global bond yields are expected to be low and the wealth manager recommends tilting toward dividend-paying equities.
Prashant Bhayani, BNP Paribas Wealth Management

Although global equity markets performed well last year, investors have preferred fixed income products over equity funds.

“Investors last year were worried about geopolitical risks, such as the US-China trade war, as well as the possibility of having a recession in the US. So last year was all about the search for yield in bonds and the search for safety,” Prashant Bhayani, Singapore-based chief investment officer for Asia at BNP Paribas Wealth Management, said during a recent media briefing in Hong Kong.

Source: BNP Paribas Wealth Management. Global bond and equity flows.

However, Bhayani believes that bond yields have gone down and will remain low at around 1.5%-2%.

“So that means we are not expecting a rally in the fixed income market like we saw last year.”

Other investment managers have also highlighted the low yield in bonds, especially since negative yielding debt makes up around 25% of the global bond market. JP Morgan Asset Management, for example, is recommending investors consider alternatives as a source of income.

BNP Paribas Wealth’s Bhayani is recommends clients consider allocating more to equities, especially those that will provide them with dividends.

“There is no alternative. Yields on global equities look more attractive relative to bonds,” he said.

Source: BNP Paribas Wealth Management

 

However, investors should look for high dividend growth and not just high dividend yields, he said. Bhayani explained that higher dividend growth companies are expected to have more stable and regular dividends.

“If you see a company that just has high dividend yield, that dividend yield could be cut in the future [for various reasons],” he said.

Bhayani acknowledged that allocating more to equities means taking on more risk. That is why for more cautious investors, he recommends quality stocks, which include companies that have high levels of research and development, higher barriers to entry and have low levels of debt.

“Quality stocks are less volatile equity returns compared with other stocks. Although they do not outperform during market rallies, over the longer term, they do outperform with less volatility,” he said.

MSCI World Quality vs MSCI World

Source: FE Fundinfo. In US dollars, three year performance.

Equity returns to moderate

Bhayani expects that global equity returns this year will not be as high as last year. For the full year 2019, the MSCI World Index returned around 28%, according to data from FE Fundinfo.

“The market has been sideways for some time, so they obviously went to new highs last year. That could continue a bit longer, but our expectations are more moderate for the year.”

He expects global earnings growth this year will be around 6-8%, which means equity market returns for 2020 will be in the “high single digits”.

Separately, Bhayani discussed some of the “long-term megatrends” that the bank has been promoting to its clients, which include areas in online education in China and healthcare.

“In China, investors have been aware of the revenue growth in the internet space, such as e-commerce.

“But online education and online tutoring are expected to become a huge trend. The online education penetration in China is only 7% right now and we expect that to grow to 57% by 2022.”

Source: BNP Paribas Wealth Management

Part of the Bonhill Group.