A new north on the investment compass

In an exclusive, Masroor Batin, CEO for Middle East and Africa at BNP Paribas Wealth Management, talks about the shift from fixed income assets to equities and the rise of young, sophisticated investors

What are your projections for 2020?

2019 began with a bit of a shock because the markets experienced a sharp correction at the end of 2018. However, 2019 eventually proved to be one of the best years on record with positive returns across most major asset classes. For example, the S&P 500 recorded a 31 per cent increase making it one of its best performances ever. 2020 also began with a shock. The global spread of the COVID-19 virus and, relatedly, a steep fall in the price of oil have contributed to significant market volatility as investors seek liquidity in the face of uncertainty. Markets for many asset types have experienced sharp movement as investors have reacted to the possibility of an abrupt slowdown in the global economy, disruption to travel and transport, and an unexpected tightening of credit.

It is too early to say with certainty how this issue will play out. But it is clear that the policy response of international governments will play a large role in determining the intensity and duration of the acute stage of the pandemic. There is no easy fix, but a decisive and coordinated response (compared to a delayed and uncoordinated response) will mitigate the spread of the illness and hasten the subsequent economic recovery. Firm action now, exhibiting clear thinking, transparency and strong leadership, will help to accelerate the eventual return of household and business confidence, both of which are critical to long-term economic growth and market stability.

Even putting the unpredictable effects of COVID-19 aside, the world is currently in the twilight stage of a long-term economic cycle. Wise investors are therefore those who have built solid levels of defensiveness into their portfolios. The key is diversification. I am absolutely convinced that in 2020, more than any other year, diversification is the cornerstone of a successful investment strategy. Even if some asset classes do ultimately outperform others, on a risk-rated basis, pursuing a broad mix of investments at the outset is the most sensible approach given the unprecedented levels of uncertainty and volatility.

What are the implications of regional political developments for the wealth and asset management sector?

We have a confident outlook on our regional business. Developments such as the inclusion of local markets (e.g. Saudi Arabia) into significant global indexes have increased liquidity, attracted capital, and put the region on the map. The record-breaking IPO of Saudi Aramco in December 2019 had a similar effect.

Many commentators have recently been fixated on various geopolitical issues. This is understandable, but their impact on our business—and indeed, on the regional wealth management sector more broadly—should not be overstated. The latest happenings have not turned investors off the region.

Investors are very familiar with the long-term factors at play, and these considerations are already embedded into their decision-making. And perhaps most importantly, longterm wealth creation in the region has not slowed down, meaning that the pipeline of customers seeking global access, expertise and diversification opportunities continues to expand.

From where you’re sitting, what interesting themes do you see in wealth management?

Through our own research and conversations with clients, we have identified 10 investment themes for 2020, which we have grouped into four broad ‘opportunities’.

“THE KEY IS DIVERSIFICATION. I AM ABSOLUTELY CONVINCED THAT IN 2020, MORE THAN ANY OTHER YEAR, DIVERSIFICATION IS THE CORNERSTONE OF A SUCCESSFUL INVESTMENT STRATEGY.”

— Masroor Batin

The first opportunity is that investors are increasingly looking for yield. Getting good returns from fixed income assets is tough in the current environment, which is characterised by sluggish economic growth and low inflation, and this is set to remain the case for a long time. The picture is illustrated by the fact that, in Europe for example, almost 20 per cent of fixed income assets are negative yielding.

For example, we look carefully at stocks which have a stable and growing dividend element baked into them. We call these ‘dividend aristocrats’—quality companies which are soundly managed, return a regular income, and still provide opportunity for capital growth. We expect these types of stocks to be very popular in 2020.

The second opportunity is that investors increasingly want to take advantage of global megatrends. There are plenty of examples of this, but I will give you two.

“EVEN PUTTING THE UNPREDICTABLE EFFECTS OF COVID-19 ASIDE, THE WORLD IS CURRENTLY IN THE TWILIGHT STAGE OF A LONG-TERM ECONOMIC CYCLE.”

— Masroor Batin

The first megatrend is deglobalisation. As the discourse of international trade comes under pressure from various directions, opportunities are springing up for investors in regional and local markets, including mid- and small-cap investments which tend to be more domestically orientated and therefore less reliant on extensive global supply chains. Some of our clients who have a medium- to long-term strategy and who have a relatively high-risk tolerance are looking with interest at this trend and capitalising where possible.

The second megatrend we have observed is an expansion of opportunities around infrastructure spending. For many governments, catatonic interest rates mean that monetary policy cannot provide meaningful economic stimulus going forward. In this context, fiscal policy is an increasingly attractive solution. As governments spend more money on large-scale construction projects, energy facilities, and water and waste management services, investors are eyeing the good investment opportunities that this trend is throwing up.

Returning now to the broad opportunity areas, the third is the growing popularity of sustainable investment strategies. This is a global trend, observed right across BNP Paribas global network. But it is particularly pronounced in this region, where a burgeoning class of young, entrepreneurial and conscientious investors has an explicit desire for its investments to bring about a positive social and

Masroor says that the growing demand for sustainable investments is a worldwide trend but it is particularly prominent in the Middle East.

environmental impact. BNP Paribas Wealth Management is doing a lot of work to raise awareness and understanding of sustainable investment opportunities with our clients.

Finally, we see potential upside in structural trends such as disruptive technology innovation. In the healthcare sector for example—the growth of the internet, the new means of communications (such as 5G) and artificial intelligence have considerably changed the industry at every level. The genome-sequencing methodology is a true revolution in treatment methods, and we believe that investors should consider these trends very closely.

How are your clients changing or adjusting their asset allocation over time?

BNP Paribas Wealth Management serves Very High Net Worth and Ultra High Net Worth clients. In general, these investors are defined by their sophisticated approach. They want a global platform, good access to credit, and local and international diversification expertise. They partner with us because we provide these things.

When it comes to changing asset allocation, a few patterns stand out. One, which I’ve already discussed, is that clients are looking to equities as a source both of growth and of income.

Another is that many of our clients are keen to in diversify into “real assets” such as property and real estate. In a low interest rate environment, securing financing for these sorts of investments provides a positive carry given that the yields remain quite good. BNP Paribas is helping more and more clients identify real estate assets, financing them through our wealth management platform, and in some cases, even providing management services. To my knowledge, no other bank has such a comprehensive brokerage platform for real estate assets.

Finally, a growing number of our clients are looking at private equity investments. Given the low growth environment and the fact that, at this late stage in the economic cycle, many asset valuations are quite high, private investments are an appealing proposition because they can target sectors such as technology which would be hard to access through public markets.

Is there currently strong demand for sustainable investments from your clients?

To answer this question, it is helpful to first define sustainable investments. Simply put, they are investments which have a positive impact on any of the 17 United Nations sustainable development goals. These cover areas such as the environment, social inclusion, healthcare, education, and gender equality. Sustainable investments involve assets which benefit society as well as delivering sound returns for their owners.

Growing demand for sustainable investments is a worldwide trend, but we see it very clearly here in the Middle East. In fact, this region is already familiar with the concept of values-based investing, because it is a key principle of Islamic finance. This has led to high levels of engagement on the issue with our local clients, many of whose activities centre around BNP Paribas’ ‘myImpact’ tool. This tool helps clients to define their goals and the impact they would like to have on environmental and social issues, which then allows us to identify and develop corresponding solutions.

It is hard to isolate a specific driver of demand for sustainable investments, but I think that two observations are illuminating.

BNP Paribas Wealth Management has EUR 393 billion in assets under management as of December 2019

The first is that many investors—especially the young entrepreneurs who form a growing share of our client base— bring to their financial decision-making an expanding range of ethical considerations. According to our 2018 BNP Paribas Global Entrepreneur report, 39 per cent of elite entrepreneurs want their investments to advantage society. There are many inspiring examples of organisations and public figures seeking to make our planet a happier and more responsible place. This spirit is shared by many investors. It is not simply that they want to tick a ‘sustainability box’ when it comes to evaluating their portfolios. Rather, they have an intrinsic interest in their investments delivering a positive impact and they adjust their strategies if this doesn’t happen.

The second observation is that good companies with a positive social effect tend to have superior valuations compared to other companies. This point is worth emphasising. Ultimately, our clients are sophisticated investors looking for optimal returns from their capital. In most cases, assets with a positive external impact will be the best option for them judged by that objective, because companies rated highly on sustainability measures usually perform well in terms of the risk-reward trade-off. So sustainable investments make sense for them both ethically and financially.

“INVESTORS ARE VERY FAMILIAR WITH THE LONG-TERM FACTORS AT PLAY, AND THESE CONSIDERATIONS ARE ALREADY EMBEDDED INTO THEIR DECISION-MAKING. AND PERHAPS MOST IMPORTANTLY, LONG-TERM WEALTH CREATION IN THE REGION HAS NOT SLOWED DOWN.”

— Masroor Batin

What are your growth plans for the region?

I was appointed the CEO for BNP Paribas Wealth Management in this region in 2018 with a clear mandate to accelerate a regional growth strategy based on global expertise and deep client understanding.

As I see it, the core challenge lies in providing a truly exceptional client experience. We want to achieve this by simplifying the clients’ interactions with the bank and providing them easy access to the full breadth of our global and regional capabilities.

Another step we have taken to get closer to our clients is to switch from a ‘location-based’ approach to a ‘marketbased’ approach. Today, our four key markets in this region are Saudi Arabia, the rest of the GCC, non-resident Indians, and Middle Eastern families who live in Europe and the UK. Our strategy is defined by how we can serve these groups best, not where we serve them from.