As the pandemic disrupted everyday normalities, investors were largely unshaken, instead boasting the freedom to place their funds anywhere in the world.
Citi Wealth Senior Client Executive Liang Ji discovered that despite limitless opportunities to invest, the mindset of ‘what you know’ proved to win out as many ultra-high-net-worth (UHNW) families opted to invest domestically.
Managing investments and providing wealth solutions for Australian-based clients, as well as offshore clients in Mainland China, Ji tells The CEO Magazine that despite the geographical locations, they all share one common interest.
“While they differ vastly in investment experience, scope and preference, the one thing they share in common is the insatiable appetite for Australian properties,” he says. “Stuck at home due to travel restrictions and lockdowns, and assisted by the historically low interest rate, investors both foreign and domestic reached the same conclusion and picked property as one of their top investment options.
“That decision appears to have paid off handsomely as the ASX only went up 9.8 per cent this year to 1 December, compared with an average of 30 per cent growth in dwelling price in New South Wales.”
Looking beyond property, political uncertainty around the US election came to an end at the start of 2021, creating an attractive investment opportunity for investors seeking US equity.
“Investors began to turn their attention away from COVID-19 and towards economic recovery and fundamentals, such as unemployment and corporate profitability,” Ji says. “The US was also ahead of other major economies in securing vaccines and opening up its economy, which in turn improved investor sentiment in favour of US equities.”
Although COVID-19 had a material impact on the global economy it has bounced back rapidly as lockdowns lifted and population mobility returned. Of course, it has also been greatly aided by central banks maintaining accommodative fiscal and monetary conditions. Nevertheless, the uncertainty pushed investors towards perceived lower risk investments like gold and bonds, as well as some sectors in the equity space highlighted by the pandemic including technology and pharmaceuticals, and resources for the recovery phase.
However, Ji believes Australian investors may have become too complacent and overly focused on property and shares.
“Australian investors have been very lucky in [an investment] sense for the past few decades,” he explains. “Our economy has seen uninterrupted growth and our biggest corporations have been showering us with fat dividends, while property prices just keep rising.
“Generous concessions on tax and superannuation by both political parties also played a big role. So when it comes to making investment decisions, Australian investors are so used to what has been on offer, there is almost a sense of entitlement and complacency.”
With challenges on the horizon such as climate change, the seasoned financial expert says investors should adapt to new opportunities.
“Economic cycles are becoming shorter and more unpredictable,” he points out. “What used to work can stop working in an instant. However, threats can also create opportunity.
“It is therefore crucially important to have an open mindset and be prepared to embrace these challenges when it comes to making smart investment decisions.”
Forced to examine what is happening in terms of the impact of their investments, the Citi wealth expert says many of his clients saw the pandemic as an opportunity to re-examine their portfolios and the investment risks it carried.
“Being a global bank, the clients we serve at Citi are more likely to have an international footprint and [global] mindset when it comes to investment,” Ji explains. “Increasingly, investors are asking if and how they can diversify their portfolio by investing internationally and often in another currency.
“For instance, an investor may like financials because they think they are best positioned for higher inflation and rising interest rates. However, they may be concerned with local banks’ high valuation and feel that the upside of investing in NAB or CBA at current levels is limited. So as a part of their investment diversification strategy, we could assist the client to gain international exposure to US banks or European banks, for example, with lower valuation and a mix of retail, corporate and markets earning capability.”
Increasingly investors are moving offshore to seek out appealing opportunities, which are simply unavailable in Australia due to its size.
For local investors hoping to diversify, it’s difficult to do so in Australia as the market is dominated by a handful of big players including banking, materials and property.
“In other words, our economy simply does not have the scale to build and keep companies like Microsoft or Apple, and our local investors are missing out,” Ji shares. “A great example of that would be Atlassian – an Australian software company founded by Australian owners, that made an initial public offering on the Nasdaq in 2015.
“A local investor may not have even heard of it or would have to invest overseas to gain exposure. Atlassian has since grown into a world-renowned software tech giant, currently valued at US$112 billion.
“Such is the demand for business software and software support during the pandemic, Atlassian’s share price has gone up by 350 per cent since the beginning of COVID-19.”
After almost two years of abnormal economic times, Ji believes the biggest investment shift this year was in investor sentiment.
“If 2020 was the year of ‘fear’, 2021 would definitely be the year of ‘greed’,” he reflects. “In the immediate aftermath of COVID-19, with so much unknown about the virus, lack of vaccine, border closures, extended period of lockdowns and US election result uncertain, investors were scared and became very risk averse – just like what we witnessed during the global financial crisis or European debt crisis.
“That risk-off sentiment has been largely reversed in 2021, as vaccines become widely available, and generous financial assistance from governments and record low interest rates worldwide start to boost consumer and business confidence. Again, dwelling price is a perfect example of that shift in market sentiment.”
How to futureproof your portfolio
Looking after UHNW clients since he joined Citi in 2017, Ji has a deep understanding of how investors can be better prepared for any future global crises.
“We have all heard the expression ‘don’t put all your eggs in one basket’ but in reality, it is easier said than done,” he says. “In terms of managing investment risk, I would strongly recommend investors have a more diversified portfolio, as opposed to having most of your net worth placed in a couple of investment properties and hoping for the best.”
What is diversification?
“The diversification strategy is essentially about reducing concentration risk and local investors can achieve that by not only allocating funds into different asset classes like equity (income versus growth), bonds, derivatives, cash and property, but also into different geographic markets and currencies,” Ji adds.
Making diversification work for you
“As technology advances and financial institutions compete fiercely for your business, it would be hugely beneficial for local investors to look beyond our borders to capture and take advantage of the investment opportunities on offer.”
Find out more about Citi’s wealth solutions.