“When everything is going smoothly, people don’t understand their true self,” Liem said. “If they’re showing unusual nervousness [during a market correction], maybe the portfolio needs some adjustments.”
The 6% drop in the US market in February was due to investors adjusting their market expectations, he said.
“In 2017 everyone was talking about a Goldilocks situation – low inflation, high growth,” he said. “The inflation number and the jobs number we’re seeing from the US in the early part of the year suggests that the inflationary pressure may be more than what people expected. That’s why the market made adjustments.”
Bond concern
Liem said that he is more concerned about bonds than equities. “Equities actually benefit from a stronger economy, offsetting negative factors from a potential rate hike,” he said.
Within fixed income, however, two opposite forces are at play. While the continuing economic growth is good for credit, boosting corporate bonds, rising interest rates are likely to bring down bond prices, especially those with longer duration.
To protect clients’ portfolios against rising rates, Liem holds bond funds with shorter duration as well as unconstrained bond funds, which respond to the market by similarly adjusting down their average duration.
Liem’s outlook on equities, meanwhile, continues to be positive, with a slight overweight in emerging markets, because of attractive valuations. “Sector-wise we’re quite neutral,” he said, adding that he considered over- and underweighting a sector a thematic, tactical approach.
He said he avoids thematic investments in most client portfolios that have a long-term horizon, as capturing them is a challenge. “Most of the time when you learn about a theme it’s already too late,” he said.
He pointed out, however, that themes such as technology, robotics and artificial intelligence are promising for more tactical-oriented investors.
In addressing clients concerns about volatility, rather than lowering exposures, he recommends diversification, by adding alternative strategies, such as managed futures hedge funds and liquid alternative multi-strategy funds.
Regulatory openness?
Hong Kong wealth managers and the broader financial industry are likely to benefit from the territory’s financial regulators new found openness to new solutions, Liem believes.
“Hong Kong regulators have become more open-minded due to global trends and competition,” he said. “They are now talking about virtual banks, which is a topic they would not explore a few years back.”
The territory’s wealth management industry, in particular, stands to benefit from the change to the stock exchange listing rules, currently under consideration, which would allow weighted voting rights.
Weighted voting rights are somewhat controversial because they would give company founders ultimate controlling rights regardless of shareholding percentage. But in a general sense, flexible listing requirements will make the Hong Kong Stock Exchange more attractive, and likely bring more capital into the city. Wealth management will be among the first sectors to benefit.
On the global regulatory landscape, while the cost of compliance continues to increase, regulatory initiatives such as the Common Reporting Standards (CRS) are gradually changing wealth managers’ calculus in providing services to foreign clients.
Before the advent of CRS, financial institutions needed to provide extra reporting for US nationals in compliance with the US Foreign Account Tax Compliance Act. Some found the requirements so onerous that they refused service to US clients.
The requirements of CRS, which are gradually being implemented through a series of bilateral agreements between countries, put foreigners from other countries in a situation similar to those from the US. “It’s not as bad to have US clients now,” Liem said.
