HNWI investors will be on the move, geographically and strategically, in 2023

Against the backdrop of volatility across asset classes, where should high-net-worth individuals (HNWIs) investors turn to in 2023? Are alternative investments viable under the circumstances?
Against the backdrop of inflationary pressures and hawkish policies from central banks, continued overexposure to traditional asset classes could be risky. Under this scenario, systematic investments into alternative assets with hedge potential are advisable. Private equity and credit, renewables, commodities, Japanese equities, health care, and energy stocks — which are relatively decoupled from conventional risk-return patterns — could garner more attention in this regard in 2023. Such asset classes translate to a parallel return profile, providing risk-adjusted alpha.

There is a bullish sentiment toward fixed-income instruments such as bonds. Will this space remain bullish in 2023? If so, what fixed-income instruments can HNWI investors rally behind?
Investors had been wary of fixed-income instruments in recent years for the right reasons — yields were evidently low owing to credit spread risks and the market’s sensitivities to interest-rate hikes. At the tail end of 2022, there were signs alluding to the halting of interest-rate hikes, in which case the fixed-income instruments could bring in good returns. Though the yields are contingent on a number of other factors, the tell-tale signs in the bond markets are promising. The continued threat of a recession, falling corporate earnings, and high real rates all support a preference for bonds over equities. Floating-rate funds, investment-grade bonds, and, notably, green bonds can be considered as part of a multi-asset fixed-income strategy.

In the context of portfolio re-balancing and diversification, what weightage do you ascribe to different investment options? Any formula in particular?
Formulaic investing panders to HNWIs with rigid business philosophies developed based on past opportunities and challenges. There is an element of discipline and “big-picture” vision associated with such investment philosophies. So, they are viable in 2023 too. On the other hand, some HNWIs, cognisant of transnational opportunities and emerging markets and asset classes, are increasingly geared toward portfolio re-balancing and diversification. Such pursuits will gain momentum in 2023 as economic activities, such as travel and trade, approach pre-pandemic levels.

Meanwhile, the changing global order will fuel ‘investment migration’, where business-friendly economies such as the UAE stand to benefit. In addition to geographical diversification, investors are inclined toward building strategic exposure to carbon markets and ESG-linked funds. Diversification away from equities into high-quality bonds and emerging market assets, particularly local currency debt, could be a viable option in 2023. These asset classes can shine amid a weakening dollar and a recovery in the Chinese economy.

What are the prospects of technology funds, ESG assets, and sustainability-linked financial instruments in 2023?
ESG-linked assets were previously shrouded in obscurity in terms of traction, mainstream appeal, and ROI. Today, due to growing awareness of the dire climatic situation and its human-led causal factors, investors are quickly warming up to sustainability and impact investing. So, globally, funds and asset classes with demonstrated impact on GHG emission control, afforestation, clean energy transition, circular economy, and SDGs are witnessing an uptake. In light of the upcoming UAE-hosted COP28, which has put the spotlight on regional efforts, impact investing could be on a rise in the Middle East in 2023.

The same notions hold relevance for technology funds as well. However, their uptake could be even higher because of rapid digitalisation across all walks of life. Data is now the backbone of our societies and economies. So, technology funds make a compelling case for themselves. In 2023, this trend will become more fragmented, meaning investors will delve deeper into segments such as robotic process automation, fintech, healthtech, AI, and Web3. Although such investments may not lead to an instant windfall, their long-term prospects are bright.

Share your thoughts on how HNWIs can navigate the rising complexities of investment products and the ever-evolving regulatory and taxation environment.
Global financial markets are in flux today. And with such dynamism comes complexities. While opportunities galore with new investment products and avenues, it is advisable to tread with caution. Investors need to be discerning and expect a wide divergence in performance.

The stakes are higher when it comes to HNWIs because they often tend to make capital-intensive investments. So, asset allocation should be accompanied by active management. That is especially true for senior investors who are looking at legacy planning. They should ensure that all plans — such as whole-life policies, estate distribution, and bequest — are in motion. For the younger generation, this period calls for calculated risks, informed decisions, and goal-based investments, where financial advisory can make a difference. Factoring in all the latest developments, we, at the Continental Group, procured a DIFC licence to enhance our offshore offerings for high-net-worth clients.

Read: What do the wealthiest individuals invest in?