One of the critical concerns that the wealthy families were keen to speak to their advisors was finding ways to protect their assets from rising geopolitical tension, according to the Zurich-headquartered bank Julius Baer.
After a prolonged period of historically low-interest rates and rising asset prices, 2022 marked the year of the ‘great reset’, the Swiss banking institution said in a report. The rising inflation was quickly followed by central banks hiking their respective interest rates while the stock and bond markets synchronically lost their value.
At the same time, geopolitical tensions became a global investment issue for the first time after many years.
“What happened in 2022’s great reset was a normalisation of interest rates after a decade of financial repression when an asset price inflation was created,” explains Reto Hintermann, Julius Baer’s Head of Chief Investment Office (CIO) and UHNW solutions. “Everything is trading again at levels more or less in line with long-term averages, although valuations aren’t super-cheap.
“From that perspective, there is now a bigger opportunity for investors. Quality fixed income assets achieve a positive yield, even after considering inflation expectations.”
Amidst this landscape, wealthy families concentrated mainly on utilising their advisers to protect their accumulated money from geopolitical threats.
Besides, they also wanted to look further into understanding and discovering real estate and private direct investments, referred to as ‘real assets’, known for providing hedges against the erosion of purchasing power in a world where inflation has recently re-emerged. Along with publicly traded stocks and bonds, the values of these assets fell in 2022, but this dark cloud also had a silver lining in the form of their valuations returning to more attractive levels.
Geopolitics
There has been increased political unrest, which has affected how investors may want to have a portfolio that expands their protection and growth. This issue should be no surprise to any wealthy family or their advisors. “We can highlight that geopolitical risks are much more important than they used to be and will influence many investment decisions going forward much more than in the past,” said Diego Würgler, Head of Investment Advisory. However, in this fresh geopolitical context, it can probably have a more robust risk management impact to concentrate rather than trying to diversify. According to Julius Baer’s 2023 Family Barometer, investors now tend to invest in their own countries or places with a known political and legal order to escape global surprises due to the chaos of geopolitics.
Real estate as an inflation hedge
The 2023 Family Barometer places real estate among the top five investments today, climbing up the ladder compared to its lower ranking a year ago. Real estate is a means of hedging for many wealthy families who find adjusting the rents against the consumer price index easy. In light of growing monetary tightening and rising property yields, most investors in real estate are aimed at residential or logistic market segments, offering possible rental income increases amid existing inflation rates. The investment can include many opportunities, such as green practices that will reduce climate risk but still have a good return from efficient technology like solar panels and water efficiency appliances or water tanks.
Private direct investments’ enduring appeal
The barometric view about large affluent families still maintains the same appeal for private direct investments. “Often people have become wealthy because they had their own business, or a former generation did, and so they know the flavour of these private placement investments, as well as the risks related to them and what it takes to be successful,” says Hintermann. These investments frequently involve co-investment in high-brand or entrepreneurial contexts, especially for technology businesses. While noting these increased risks, investors still go for portfolio programs instead of individual deals in private direct investments. Like other asset classes, private equity valuations plummeted in 2022 and are still below levels in prior years.
Hintermann forecasts a good chance it will be a successful vintage year in 2023 since the funds received are expected to be put into use within the next few years.
Long-term gains, short-term safety
Navigating through uncertain times calls for strength in most countries facing the threat of recession. How should wealthy families adjust their investment portfolios after the great reset in 2022? What asset class should they go for? How should risk be assessed? This can be difficult for individuals and families who want to build and safeguard their wealth against volatility. This involves the knowledge of the broad macroeconomic surroundings within which a firm operates and the art of moving between competing avenues for investment. Each family should adopt something it can relate to itself. However, those who want to be actively involved in managing their investments will either seek help from such experts or free themselves up and focus on other things. Or, as Diego Wuergler puts it: “It is not important how you address the management of your investments, as long as you do it consciously and own the process before it owns you.”
