“…Private wealth is where we are seeing real growth. Hedge fund portfolio managers are coming to Dubai and making investment decisions. For them, Dubai is the place where talent wants to come to make the most of the attractive business environment and experience the city’s world-class lifestyle offerings. Sovereign wealth funds have always been sophisticated, but what we are seeing now is a substantial growth in private wealth. Private wealth has traditionally been held in assets, such as cash, real estate and physical businesses. Now, this capital is increasingly being invested in financial markets, resulting in a significant increase in assets under management…”
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Topic of the week.
Five most relevant investment themes for 2023
BNP Paribas Wealth Management presents its five most relevant investment themes for 2023
The five investment themes for 2023 focus on new income sources, strategies to embrace market volatility, responses to the energy crisis, long-term opportunities going beyond the inflation and rates peak, and the energy transition.
“Investors looking for generous and secure yields have access to a large choice of solutions today. The elevated market volatility regime that we are seeing is not about to change. We have entered a new era of structurally higher inflation and greater uncertainty than in previous decades. Inflation and interest rates will decline from current decade highs. Finally, persistently high energy costs will encourage accelerated investment in energy transition and efficiency,” says Edmund Shing, Global Chief Investment Officer, BNP Paribas Wealth Management.
THEME 1 – Seizing new income opportunities from TINA to TARA
After years of loose monetary and fiscal policies, bond yields fell to nearly 0% or even below zero and investors had no choice but to invest in equities to find reasonable returns. Those days are now past. The recent dramatic surge in bond yields and the widening of credit spreads have created some new interesting opportunities in the bond segment.
We recommend a cross-asset theme (bonds and equities):
- US government bonds for dollar investors and long-term UK government bonds.
- Investment Grade corporate bonds in the US and in the eurozone.
- Unconstrained bond funds.
- Equities, with a focus on solid companies that deliver growing dividends.
- Income-focused structured products.
THEME 2 – Embracing market volatility
The year 2022 will rank as one of the highest years in decades for volatility in global bond and foreign exchange markets given the uncertainty around interest rates and the question of when inflation would peak. In addition, global equities entered a bear market and are experiencing higher volatility amidst mounting fears about the extent of a potential recession.
This environment is creating enhanced opportunities for investing in:
- Cross-asset structured solutions.
- Global Macro and trend-following strategies.
- Gold that could shine again as inflation peaks.
- Higher quality companies with raising dividends.
THEME 3 – Investing in a new era
The COVID-19 pandemic, the ensuing economic stimulus and escalating geopolitical tensions have ushered in a new environment of high inflation, largely on the back of a shortage of cheap energy, sharply rising interest rates, and a reversal of globalisation in favour of nearshoring. These shifts are structural in nature and the new economic era require a completely different investing mind-set.
We see investment opportunities in:
- Reuse and recycling of goods and services via investment in circular economy leaders.
- Energy security (energy transportation and storage infrastructure, battery metals, renewable energy generation, hydrogen economy).
- Food security and water efficiency (more effective water irrigation and desalinisation, companies which combat food waste).
- Technology security: cybersecurity, semiconductors, satellites.
- Industrial automation.
THEME 4 – Looking through the inflation and rates peak
Long-term investors should look beyond the peak in inflation and policy rates to the investment opportunities that lower inflation and long-term rates can offer.
This theme focuses on Equities and Fixed Income. Spreads and yields on Investment Grade credit now offer attractive opportunities in:
- Quality stocks with strong cash flow and solid balance sheets which should allow companies to take advantage of easing input costs.
- Luxury brands which can easily raise their prices without lowering their sales volumes.
- Businesses that ramp up Capex both in digitalisation and automation in a bid to adapt to a tightening labour market, and in security to mitigate risks from cybercrime.
- Emerging market equities that could benefit from a weaker dollar in 2023.
THEME 5 – Accelerating energy efficiency
In the context of global warming, tensions with Russia and soaring fossil fuel prices, the race to find alternative solutions to curb energy spending and reduce greenhouse gas emissions is needed.
We prefer equity solutions for this theme (direct lines, funds and trackers) as well as private equity funds investing in energy infrastructure. This theme has several sub-themes, such as insulation, smart control systems for lighting and signalling, renewable energies and technologies that capture or recycle carbon dioxide.
Hedge Funds 2023 stock picks
The UK has its first hedge fund manager prime minister in Rishi Sunak, who worked for Sir Chris Hohn at TCI Fund Management before entering politics. But the exact work of Mayfair’s ‘hedgies’ — elite traders and investors who tend to eschew the limelight — is often hard to discern.
A band of leading hedge fund managers pressed pause on the publicity-shy approach at Sohn London, an investment ideas conference in support of paediatric cancer research.
Here’s what some top hedgies are betting on in 2023.
Investment tip: European recovery
Europe has been out-of-favour with global allocators this year amid high inflation, weak growth and war in Ukraine. However, Mike Edwards, deputy CIO at New York-based Weiss Multi-Strategy Advisers, tipped the region to do better next year.
‘We are actually fairly constructive — in a contrarian sense — amid a mood of real doubt,’ he says. ‘In particular, we are relatively constructive on Europe and European cyclicals.’
Edwards tipped European stocks to benefit from the unwind in US tech stocks. ‘We are clearly seeing rotation out of US mega-cap tech,’ with money going to ‘reliable cashflow’ companies.
‘That brings European cyclicals into focus, an area under-emphasised among global allocators.’
Remarkably, at times this year the seven largest US tech stocks have had a market cap larger than all of capitalised Europe.
Niche opportunities
The Sohn event is renowned as a rare public window into leading hedge fund manager trades.
Ivelina Green, the founder of Pearlstone Alternative in London, was positive on the outlook for distressed credit. And in an example of how niche the pitches can be, she pitched litigation/liquidation claims pertaining to the 2014 bankruptcy of Portuguese lender Banco Espírito Santo.
Some of the trades drew inspiration from unexpected quarters. Abhishek Agrawal, an event-driven manager at Polygon Global Partners, tipped games-based learning app Kahoot! that allows users to create and play games.
Agrawal told the audience he ‘didn’t realise it was so popular with kids’ until his daughter came back from school raving about the app.
Chris Dale, who runs long/short equity firm Kintbury Capital in London, is betting against Ocado. He said he saw a 50 per cent downside in the share price.
‘Pipeline and Covid drove the valuation upward,’ he said, but rivals like Aldi and Lidl have made much more progress since.
He was one of several speakers at the event to highlight the shift in market drivers, with the era of Covid lockdowns, state largesse and low interest rates now replaced by fiscal and monetary tightening and recession across Western economies.
Lower inflation
Daniel Avigad, an equities manager with Lansdowne Partners in London, pitched a long position in Boliden, a Swedish mining company.
In a separate interview he said inflation has probably peaked. ‘(It) is going to most likely start to come down,’ he told CNBC.
‘There is an argument that if equity markets and bond markets rally very aggressively, it amounts to an easing of financial conditions too early in the cycle for what central banks want to see.’
That remains to be seen. But lower inflation will certainly be welcome to Western economies mired in double-digit price increases this year.
Dubai: What it means for hedge funds
Growth markets across the Middle East, Africa and South Asia (MEASA) region are attracting the attention of financial institutions and investors around the world. As governments pursue economic diversification and economies transition towards fully digitised operations, MEASA markets offer enormous untapped potential for ambitious investors.
Dubai is seeing significant growth in investment capital. According to Dubai Investment Development Agency, part of the Department of Economic Development in Dubai, the Emirate saw a 16% rise in investment projects in the first nine months of 2021, attracting around $4.33bn in foreign direct investment – and the numbers are only trending upwards.
“Private wealth is where we are seeing real growth,” says Ali Hassan, senior representative for Europe and North America at Dubai International Financial Centre (DIFC), the leading global financial centre in the MEASA region. “Hedge fund portfolio managers are coming to Dubai and making investment decisions. For them, Dubai is the place where talent wants to come to make the most of the attractive business environment and experience the city’s world-class lifestyle offerings,” he adds.
An optimum location for asset raising
“The MEASA region itself is a significant source of capital, and this has been well established over decades,” Hassan explains. “It has an aggregate of around $7trn of investable assets.”
The total value of assets includes both traditional sovereign wealth funds and an increasingly active private wealth pool of around $3.5trn, he says.
“Sovereign wealth funds have always been sophisticated, but what we are seeing now is a substantial growth in private wealth,” adds Hassan. “Private wealth has traditionally been held in assets, such as cash, real estate and physical businesses. Now, this capital is increasingly being invested in financial markets, resulting in a significant increase in assets under management.
“Dubai is a great location for asset raising, and there is a real appetite for alternative assets. Venture capital firms and asset managers are seeing value in their fixed income strategies for regional clients and realising that there is more they can do in the region if they have a more substantive presence.”
An ideal base for international hedge funds
As an independent free zone, DIFC provides an optimal legal and regulatory infrastructure and support for hedge funds seeking access to the MEASA region. This framework is based upon English common law, which is the global standard for financial services. In recent years, DIFC has also made several enhancements for hedge fund clients looking to domicile both their manager and fund at DIFC. For such firms, DIFC registration costs have been waived, regulatory capital has been reduced, and regulatory fees have been lowered by up to 60–80%, depending on the business model.
“As the premier financial centre in the region, DIFC is a natural choice for a hedge fund’s location,” Hassan explains. “In DIFC, the hedge fund community is well connected. They feel comfortable because their peers and major global and regional financial institutions are present.”
Why hedge funds and portfolio managers are choosing Dubai
Investors are looking to benefit from Dubai’s reputation as a business-friendly environment with unique lifestyle opportunities. “Hedge funds and portfolio managers are seeking to relocate to Dubai,” says Hassan.
Portfolio managers value Dubai’s appeal, especially in contrast with their respective cities, which remained closed during Covid-19. Firms realised that Dubai is highly vaccinated and open for business. The city is modern, cosmopolitan and safe for families, and offers outstanding healthcare and education. For hedge funds, DIFC’s legal and regulatory platforms are world-class and benchmarked against top global financial centres. As a result, firms and individuals are moving here, many with families.
The post-Covid work environment allows for more flexibility since the pandemic broke the relationship between ‘what you do’ and ‘where you do it’. Companies noted that they have the luxury of attracting talent to the most desirable locations. The UAE government is highly supportive, offering enhanced visa schemes, including the five and ten-year Golden Visa, providing hedge funds managers with the ability to attract and retain world-class talent.
Dubai’s geographical location and time zone are also advantageous for those with global strategies. The Emirate serves as a bridge between the leading financial centres of London and New York in the West, and Hong Kong and Singapore in the East. Furthermore, Dubai’s airports provide easy and regular connectivity to almost all major cities of the world.
From the respected legal framework and ultra-low rate of taxation to the multiple opportunities for building lasting business connections, these factors provide investors with greater certainty. DIFC offers hedge fund managers the support they need to access the wealth of opportunities available in the region, along with the chance to operate from a leading regional hub alongside prestigious peers.
Links to consider
- Getting vs. staying wealthy, an except from “The Psychology of Money” by Morgan Housel
- Christine Benz and Jeff Ptak talk the evolution of financial advice with Preston Cherry founder and President of Concurrent Financial Planning
- How to Handle a Sudden Financial Windfall
- Three reasons why indexing works and continues to grow
- Kenny Malone and Greg Rosalsky talk with Yale economist James Choi about his paper “Popular Personal Financial Advice Versus The Professors.”
- The Great Wall (Of Indifference). Is China’s stock market still even investable?
- Credit Suisse Clients Flee to UBS in Asia as Rich Weigh Options
- This Is Where Luxury Property Prices May Rise and Fall the Most in 2023
- The ‘Succession’ effect: how TV dramas got angrier about the rich
Infographics
Quotes
Books that caught our attention this week
The DiNuzzo “Middle-Market Family Office” Breakthrough: Creating Strategic Tax, Risk, Cash-Flow, and Lifestyle Options for Successful Privately-Held Business Owners and Affluent Families
by P.J. DiNuzzo
More personal and business wealth exists in the world today than ever before, as privately held business owners creatively grow their companies. Unfortunately, the private wealth industry has not kept up and options for successful middle-market business owners are limited. Only the world’s wealthiest families have access to the expertise needed to truly achieve their business, personal, financial, and philanthropic needs. In The DiNuzzo Middle-Market Family Office Breakthrough, private wealth advisor P.J. DiNuzzo reveals the first and only structure through which he and a well-coordinated team of experts help middle-market business owners get the same level of service once only reserved for the ultra-wealthy.
Publisher: Morgan James Publishing (August 30, 2022)
Language: English
Paperback: 288 pages
Optimizing the Financial Lives of Clients
by Russ Alan Prince
The hours and costs to increase revenue within a service-based accounting firm can pile up fast. So many tools, formulas, and schemes miss the mark. So be warned: what financial thought leaders Russ Alan Prince, Homer Smith, and Paul Saganey share in this book is not for everyone. Their method to uncover additional opportunities, offer more services, and develop recurring revenue is elite. It optimizes the financial lives of clients and keeps the accountant at the center of the process. With the expertise inside these pages, managing partners can position accounting firms for long-term success. But you must commit to the Four Core Principles and Everyone Wins Process of elite wealth management. Go deep with client relationships. Deliver exceptional value. Grow with elegant simplicity. This is elite.
Publisher: Houndstooth Press (November 1, 2022)
Language: English
Hardcover: 150 pages
Photos
Indonesia puts 100-island archipelago up for auction
The development rights to an entire Indonesian archipelago with more than 100 tropical islands is set to be auctioned next week. The uninhabited Widi Reserve is based in a marine-protected zone in the “Coral Triangle” area of eastern Indonesia, and will go on sale via Sotheby’s Concierge Auctions in New York from 8-14 December.
The sale of islands to non-Indonesians is banned under Indonesian law, so buyers will bid for shares in PT Leadership Islands Indonesia (LII), an Indonesian development firm that has licensed the rights to build an eco-resort and luxury residential properties on the reserve.
Spread out over 10,000 hectares (25,000 acres) north-east of Bali, a Sotheby’s representative described the islands as “one of the most intact coral atoll ecosystems left on Earth and an animal kingdom of epic proportions, home to hundreds of rare and endangered species,” among them blue whales, whale sharks and “species yet to be discovered”.
Included in the development plans is a private airstrip that can serve guests from destinations such as Bali, Jakarta, and Cairns. “Every billionaire can own a private island, but only one can own this exclusive opportunity spread across 100-plus islands”.
While the listing does not state an expected starting price, bidders are asked to put down a US$100,000 deposit. Bidding opens at 4am (ET) on 8 December, with the winner required to invest “a substantial amount” into the development.