The year actually began extremely well for client portfolio performance, that is, until March, Bacon told FSA.
“March was not just a collapse in markets but also a certain percent of clients using leverage had to unwind their portfolios.
“But it was very calm. There was no panic like in 2008, when the market correction took place over a longer period of time and people started to think about the complete collapse of the global financial system.
“This time around, if I had to generalize, clients were asking ‘When do we start buying?’”
He added that Citi’s trading business in Asia year-to-date has hit record volume levels in 2020 and the Hong Kong night desk that trades US equities also set a record. “It’s largely attributed to high market volatility but also the fact many clients were stuck at home and had time.
“Our clients are typically entrepreneurs and they didn’t have as many distractions during lockdown. They wanted to talk to us to get our views.”
Don’t sell
In any case, Bacon said clients were urged not to sell positions as markets collapsed.
“It was the speed of the decline that was extraordinary. Clients who stayed fully invested and did not sell in March due to risk-off or margin issues did far better than those who sold and did not re-invest.
“Cash is not king. It is king when markets are going down but when they are more normal it’s a major drag on portfolio performance.”
Clients have participated in the recent rally, but cautiously, he added.
“For the balance of the year we are feeling relatively optimistic,” Bacon said. “The growth rebound certainly will continue but we think it will take longer than some market participants are saying. Some corporate earnings could take several years to get back to 2019 levels.”
He cited a prime buying opportunity in the “massive dispersion between defensive and cyclicals”.
“Companies extremely resilient during [the pandemic], such as IT, consumer staples, communications versus the cyclical side, materials, energy, leisure. Staying nimble with cash is the main message to clients right now.”
His biggest concern is that clients will become complacent too quickly. “We remind people the situation will take a long time to normalise. It is simply not the case that markets will be back to normal by the end of the year.”
Proactive managers
Bacon believes the industry experience from the 2008 financial crisis was brought to bear in March 2020.
“In Asia, prior to 2008, clients were very equity-centric. Since then they have changed dramatically and have more diversified portfolios across geographies and asset classes and are staying invested and being patient. It is much easier to have a conversation about that now. 2008 prepared us well.”
He said in most cases he has been pleased with the response of third-party fund managers as their products went down in the market plunge.
“We’ve had a few cases of managers who suffer extraordinary poor performance and go into hiding and we have to decide whether to keep those relationships. But the majority of managers, across mutual, private equity, real estate and hedge, have been proactive.”
He said what worked this year through the market stress was the bank’s call in 2019 to overweight Asia and China equities, and in US equities, it had an overweight call on healthcare and IT, all of which held up reasonably well.
But some strategies didn’t work well. In equities, the bank had believed that the search for income in a low interest rate environment should include companies with persistent dividend growth. “We put a major focus on that in 2019. In March 2020, many of these companies were cyclical and they suffered.”
Another asset that fizzled was in fixed income. Structured credit with positions in mortgage backed securities “saw a very rapid disappearance of liquidity. The instruments have been attractive as a differentiated source of income but that did not play out well in March. Some hedge fund managers in this space saw 25%-35% drawdowns on monthly NAV.”
Clients were encouraged to stick with the strategy and many have recouped some losses though it may take a few more quarters to flush out, Bacon said.
“A couple hedge fund managers who had a monthly uptick in NAV for the last five years experienced [drawdowns] in March that have never been seen before. That’s not part of their risk model.”
WFH
Citi in Hong Kong is 50% back in office and using a rotational cycle. Bacon said some employees working from home found they were more productive and some struggled, such as traders with six display screens in the office shifting to a simple laptop at home.
But on balance he was impressed with the level of focus maintained through the period.
“As an analogy, imagine if you were trying to test your work-from-home system with 250,000 people globally, tomorrow. That is effectively what big companies had to do.
“We went through the ultimate fire drill. Under the circumstances it has been a fantastic success and in my opinion will lead to fundamental mindset shifts, from the most junior to most senior levels, as to what the workplace of the future will look like and how technology can impact our ability to do work.”
In Hong Kong and Singapore, people working from home have a strong desire to get back into the office, he added.
Bacon believes what’s missing when working from home is the power of collective thinking when everyone is in the office.
“If we don’t have interactivity among team members and sharing ideas, you do miss that edge.”
The bank is currently surveying employees to determine work location preference, which could turn out to be home/office balance.
Greater Bay Area
Unlike HSBC and Standard Chartered, which have come out in support of China’s recent decision to impose a national security law in Hong Kong, Citi has not publicly commented on the issue.
Bacon would only say that he believed in Hong Kong’s resilience and its continuing status as a regional financial hub.
He mentioned the proposed plan for the Guangdong-Hong Kong-Macao Greater Bay Area, which has as one of its goals borderless wealth management in the region.
“There has been a lot of hype about the Greater Bay area and I’ve seen some outlandish projections,” Bacon said.
“We are more pragmatic. We have a team of bankers and specialists focused on the GBA to try and understand the interlinks with Hong Kong and how this will evolve.
“This could be a mechanism for significant growth in the region. We think it is real and we think it will accelerate over the next 3-5 years.”
