08/11/23

US: Wealthy defy deglobalisation to diversify into US assets

As published on: ft.com, Wednesday 8 November, 2023.

Wealthy individuals are defying the trend towards “deglobalisation” in a fracturing world, by diversifying their investments further — and principally to America.

Affluent investors in Europe and Asia, for example, have been allocating more of their portfolios to assets outside of their home region, with many choosing the relatively haven of US markets.

“I have been very impressed by the size of the inbound investment into the US [from global clients] over the last 5 years,” says Aaron Bates, head of ultra-high net worth and growth strategies at Bernstein Private Wealth Management, which advises and invests for wealthy families. “It continues to be [seen] in residential real estate, but also [in the] movement of money into pure dollars, and private equity and credit markets.” 

“Candidly, the US market has led public markets since the Great Financial Crisis . . . there’s been a homestyle bias, not just in terms of geopolitical risk, not just due to US outperformance and strength of the dollar, but also because the US has been a leader in new technologies like AI,” he explains.

Wealth managers say that the increase in geopolitical volatility, with wars in the Middle East and mainland Europe as well as tensions in the Taiwan Strait, has led high net worth investors worldwide to look for established, stable companies and investments.

A UBS survey published earlier this year of some of the world’s wealthiest family offices, investment vehicles built to manage the fortunes of rich families, found that geopolitics had become the number one concern for those offices based in Europe, Asia Pacific, Switzerland and Latin America. In the US, it was second after fears of a recession.

For some, it has meant that the definition of global diversification has changed. “While, previously, we were investing more of our liquid portfolio in emerging markets, now we see ourselves investing 80 per cent [to] 90 per cent in Europe and the US,” the chief investment officer of a Danish family office told UBS.

A similar Goldman Sachs survey found that, worldwide, family offices reported allocating 63 per cent of their capital to the US on average, with 21 per cent to other developed markets. It also found that 26 per cent of family offices were looking to increase their allocation to the US and 27 per cent would increase allocations to other developed markets in 2023. 

“Our wealth clients are very focused on profitable companies with stable margins that can stand volatile markets,” explains Sara Naison-Tarajano, partner at Goldman Sachs. “That creates a bit of a bias for megacap companies that are typically US based.”

Private credit — providing direct loans to businesses, often for acquisition purposes — is one of the newest drivers of this increased investment in the US, given the country has the deepest and most sophisticated private markets. Steve Schwarzman, co-founder and chair of Blackstone, which offers private credit products to individual investors, said of the asset class at a conference in September: “If you can earn 12 per cent, maybe 13 per cent on a really good day in senior secured bank debt, what else do you want to do in life?”

Bates recognises the logic. “We really saw a large opportunity for families to step into the private credit space as banks chose to pull out [of some lending in the US]”, he notes. He regards the private credit markets as a “generational opportunity” for wealthy individuals following the turbulence that afflicted smaller banks in the US, after the collapse of Silicon Valley lender SVB.

Meanwhile, in China — the country with the single highest number of billionaires according to the Hurun Rich List 2023 — experts say that investors are further diversifying assets held outside of the mainland as the economy slows and the domestic political situation remains uncertain.

“There’s definitely a bigger focus on global diversification [by Chinese clients],” says Adrian Zuercher, the chief investment officer of UBS’s global investment management unit in the Asia-Pacific region. “Those that are able to bring out money are trying to diversify away from China exposure. Hong Kong is still the gateway to China but they’re definitely becoming more interested in our booking centres in Switzerland and Singapore.”

Chinese investors do not tend to hold a lot of European assets, “probably related to currency [fluctuations]”, he adds.

One wealthy Chinese investor based in Hong Kong, who asked not to be identified, told the FT that Singapore looked to be an increasingly attractive place to store assets, due to the relative stability of its currency.

And, regardless of superpower tensions, Chinese and Hong Kong-based clients are “still very willing to invest in the US”, according to Zuercher.

One exception to the HNW trend of increasing allocations to the US can be seen in Americans themselves. Wealthy US investors are already overweight their home market, and so are looking elsewhere.

According to Tiger 21, a mostly American group of 1,300 investors with some $150bn in assets, a diminished interest in China has been offset by increased investor interest in India, and strong interest in western Europe. 

“We do have clients looking at Europe,” says Naison-Tarajano. “The valuations are interesting, clients are focused on developed markets.” But she adds that advisers are “not seeing much big strategic allocation to emerging markets”.

Tags

US assets Deglobalisation USA Wealth management