Citi has so far had a strong year compared to 2016, according to Bacon, and client appetite for investment solutions “has increased dramatically”.
“Not just because of the aftermath of the US election that created a temporary feelgood factor and risk appetite. It’s more fundamental. Clients are of the view the world is gradually healing and things are getting better, we are not on the precipice as in the past.”
“Now we have more clarity with the interest rate landscape over direction of rates, particularly in the US. It will be gradual but definitely we are in that stage of cycle. Europe is a little less predictable, but the French election is over.”
EM and Asia
Bacon’s new role (announced in April) as head of investments has him overseeing the managed investment, capital markets and investment counselling teams, in total about 130 people. He also has responsibility for the bank’s investment lab in Asia, which he describes as helping clients understand the totality of their investments across all banking relationships.
Filling Bacon’s previous role as the new head of managed investments will be Adam Proctor, who will be based in Singapore beginning next month. Proctor has a background in relationship management and was running Citi’s global client business out of London.
Emerging markets optimism has become a consensus and Bacon likes the region – to an extent. He prefers just the Asia part (Asia makes up roughly 70% of the MSCI Emerging Markets index).
“Our focus is on Asia, Asian EMs, not East Europe, not Africa, not the Mideast. Asia has a better macro backdrop than other parts of EM.”
In the second half, he forecast that clients will add Asian equity exposure as investor appetite increases.
Clients are particularly focused on India, he said. “The growth trajectory seems to be robust, even in the face of some policy decisions such as the elimination of large denomination currency notes. India is not a market that Asia clients have favoured typically over the last 10 years, but now they are seeing great opportunities.”
He also believes investors have generally become constructive on China after an extended period of concern. “The levels of pessimism toward China equities were probably overstated.”
Clients have a smaller equity allocation than fixed income because generally, people lack confidence in the equity markets this year, he said.
“Equity investors are waiting for policy clarity from the Trump administration. Infrastructure, financials and healthcare are sectors that should benefit depending on the extent to which he delivers what he promised.”
Fixed income flows for Citi’s wealth management clients were strong in 2016 and stayed stronger than expected. “You would think they’d start to temper a bit given the rate cycle, but a lot of it is underpinned by the ongoing need for income from our clients. That’s not going away. Fixed income remains very robust this year with a slight increase in equities.”
However, clients are dialling back exposure to plain vanilla fixed income and looking for enhanced and differentiated sources of income.
“The last 15 months fixed maturity products, bond funds, have been very popular. Last year we developed an EM debt product. It was the only one on the market at the time and was phenomenally successful. We are trying to identify niche opportunities.”
Turning to illiquid alternatives, Bacon said hedge funds haven’t delivered on promises but the products play an important role in a diversified portfolio and client interest is increasing. Private equity and real estate are asset classes Citi’s clients find attractive. Private equity funds, for example, are compounding interest in the low teens, he said. However, there is a caveat.
“A portion of illiquidity clients are comfortable with, but they are asking for more transparency so they know what they are buying before writing the check. [Alts] allow us to tackle some themes in global investments. Distressed strategies, pre-IPO — you can’t do those in a liquid structure.”
Volatility and market health
US market volatility is at a 23-year low despite generally high historical valuations. Bacon believes it’s because cash is on the sidelines. Trading volumes are low because investors don’t have strong conviction, something that should change after US policy is more clear, he added.
“Volatility has come in much lower than peoples’ expectations given the market scenarios. It means people generally are taking the view that markets are in a more robust state than might have been the case 12-24 months ago.
“The Trump victory did not result in a massive selloff and that suggests people are more optimistic about world growth. That bodes well for the rest of 2017 and it is one reason we are seeing optimism toward Asian equities.”