In an exclusive interview, Gulf News caught up with Yves Bonzon, Group Chief Investment Officer at Swiss Wealth Manager, Julius Baer. During the discussion, we look at what are the key trends that will shape the economy and markets this decade? This question is of the utmost importance, because as long-term investors, one cannot afford to swim against the tide. What must an investor consider in their portfolio?
How has 2021 shaped the evolution of secular trends for this decade?
This year, the identification of structural forces, as well as their disentanglement from cyclical ones, has proved to be even more challenging than usual. We are at an important inflection point. Not only are we at the beginning of a decade, a time when new trends are still hidden and simmering under the surface, but we are also at the tail end of four decades of disinflation.
Society in advanced economies is transitioning from neoliberal orthodoxy to an era of ‘state-sponsored capitalism.’ The former is characterised by fiscal prudence and monetary policy dominance, while the latter will seek to use the full combined force of both monetary and fiscal levers, with the aim of reducing the growth-debilitating inequalities that have emerged as a direct result of neoliberal policies. The end game is reflation – and no, we are not there yet, despite what the current inflationary episode, on its surface, might suggest.
The extraordinary nature of the Covid-19 recession and pandemic-induced policy response has affected supply and demand in a way that makes it very difficult to separate temporary from more persistent inflationary forces.
Chinese markets have been challenging this year. The country’s rise to core asset class status however remains a part of the secular trends you defined. Why is that so?
2021 has been a momentous year for our strategic call on China. Back in 2017, we introduced the theme of Chinese assets ascending to a stand-alone core asset class and assigned a 5 per cent strategic allocation to Chinese equities, which constituted the entirety of our strategic allocation to emerging equities. The thought process behind the decision was clear: if the two major sources of global growth were technology and emerging markets, China was the only place where the two growth engines converged. However with the developments in late 2020 starting with the government pull back of the IPO of the country’s largest FinTech company, there was no doubt that China will not let capital grow exponentially within its borders. The country’s tightening regulatory fist means that the value, not just the valuation, of Chinese equity markets has been impaired.
Does that mean that our strategic case for the asset class is dead? I do not think so. I believe the Chinese 60/40 portfolio will still be a strong contender during this decade – with emphasis on the 40. Moreover, the diversification benefits that both Chinese equities and bonds bring remain strong in a world that is becoming bipolar.
If you had to pick one trend that has made it into your secular outlook in a big way, what would it be?
A major trend that has become more salient, which we have included for the first time in this year, is the blockchain technology and the rise of crypto assets. Digital assets and the decentralised systems that they are built on will be the foundations for the next digital and internet revolution.
One of the prospects of digital asset disruption that stands out is the digitalisation of trust, ensured by the encrypted, non-corruptible nature of the blockchain. The blockchain revolution will have deep consequences, and it will most likely not only disrupt financial services but also propagate across all sectors of the economy, as businesses rely more and more on technology.
We are entering a new era of ‘Web 3.0,’ the third internet revolution, where we will see the emergence of the decentralised internet thanks to blockchain technology. One of the most fascinating aspects of Web 3.0 is that it might displace the winners of the last decade, i.e. social media and web platforms, whom we have come to know as the tech giants. Moreover, blockchain could help to solve the data-privacy issues created by social media platforms by giving ownership back to the data subject. The path to Web 3.0 will not be a smooth one, however, and it is likely that we will see many players in the space disappear before true leadership emerges.
Society in advanced economies is transitioning from neoliberal orthodoxy to an era of ‘state-sponsored capitalism.’
Speaking of digitalisation, do you believe that the acceleration of healthcare trends will continue?
The outbreak of the Covid-19 pandemic has clearly shown the weakness of the entire healthcare value chain, from citizens to international health institutions. However, the pandemic is not the main driver of the highlighted need to improve the current healthcare system; it has merely acted as the accelerator of an already ongoing development. Momentous demographic shifts around the world, the emergence of chronic diseases associated with ageing, and ever-growing medical costs are strong tailwinds that are likely to create further upside potential for areas related to digital health, genomics, and extended longevity in the long term. The greater adoption of digital health technologies and other innovative solutions, such as gene-based therapies, could strengthen our resilience for present as well as future health threats and ease the pressure on current healthcare systems. China is likely to continue to catch up with Western nations in healthcare innovation, especially under the notion of ‘common prosperity,’ in which affordable access to high-quality healthcare is seen as a top priority.
The key aspect of such disruptions in the life science space is the more general proliferation of data. Going beyond digital healthcare, life sciences will become more and more similar to information technology, as molecules and compounds are created artificially and personalised using artificial intelligence, robotics, and nanotechnology. This trend is part of the ‘everything tech’ theme that we are seeing emerge, as every industry, from biotech to manufacturing to energy, is moving to become a technology business.
Energy transition has emerged as a key point of discussion over the last couple of years especially as Sustainability becomes a priority for many economies. Where are we heading?
The world has embarked on a major shift towards net-zero carbon emissions. Therefore, the needed energy transition is in full swing. The ‘electrification of everything’ has started, where new technologies are satisfying our growing energy needs and reducing our dependency on fossil fuels.
Decreasing investments into fossil fuels, coupled with economic reopening effects, as well as some ill-timed political decisions, have led to supply-chain disruptions, energy shortages, and soaring prices.
This shows that the world is struggling to shift to renewables at this fast pace and that the swift energy transition can act as an inflationary force in the short term. In the long term, on the other hand, we believe that technological advancements in this space will increase productivity enough in order to act rather disinflationary. The adoption of clean energy sources in society is well underway. It is clear that the transition away from fossil fuels towards cleaner energy sources will take more time and require great efforts from both governments and corporations, but we believe that it is an inevitable development that will be successfully implemented in the long run, despite some noise and market disturbances in the short run.
Finally, the topic of the decade – ESG. Governments are now making net-zero pledges. Do you see this as a major paradigm shift for wealth managers?
Environmental, social, and governance (ESG) criteria have been the buzzwords of the last few years and will continue to be one of the most important trends to follow in this ongoing decade. The United Nations Climate Change Conference (COP26) that was held in Glasgow in November has underlined the important role that the corporate sector, in general, and the financial sector, specifically, play in decreasing the world’s environmental footprint.
These growing environmental and social tensions mean that corporations need to redefine their purpose and should take into account not just shareholder value but also their impact on all stakeholders, including workers, suppliers, communities, and society at large. The notion that incorporating ESG criteria into the investment process makes investments less profitable is disappearing, which supports the move towards an environmentally friendly stakeholder economy.
Incorporating ESG criteria into the investment process cannot follow a ‘one-size-fits-all’ approach but rather must be subject to the personal preferences of the individual investor through personalised portfolios. While it is clear that finance will play an important part in a sustainable future, one has to be mindful that finance is not the ultimate solution and cannot do it alone. Governments, corporations, and individuals have to work together towards this common goal and take responsibility for driving this much-needed transition.
