‘Prioritise the fundamentals when investing’, says SJP’s Martin Hennecke

In an ever-changing global economic environment, staying ahead of investment trends and identifying opportunities is crucial for financial success.

In an exclusive interview with Gulf Business, Martin Hennecke, head of Asia and Middle East Investment Advisory at St. James’s Place (SJP), one of the UK’s largest wealth management firms, provides insights into the investment landscape for the year, with a particular focus on the Gulf Cooperation Council (GCC) region.

Given the evolving global economic landscape, what are the key investment trends and opportunities you foresee for 2024, particularly in the GCC region?

In 2024, the GCC region presents several promising investment trends and opportunities driven by economic diversification efforts, technological advancements, and sustainability initiatives. Key sectors in focus include renewable energy, driven by ambitious national projects like Saudi Arabia’s Vision 2030; digital transformation, with increasing investments in fintech, AI, and e-commerce; and real estate, buoyed by urbanisation and infrastructure development. Additionally, the healthcare sector is expanding due to growing populations and increased government spending.

However, it is crucial to avoid simply equating macro trends with equity market opportunities. One of the most common investment pitfalls we have observed is that investors often focus too much on what is currently popular and exhibit ‘recency bias’, assuming that assets, markets or sectors that performed well in the recent past will continue to do so, and vice versa that areas which are depressed, neglected by the media in the absence of trendy storylines will continue to underperform.

Instead, investors should prioritise the fundamentals – earnings, growth prospects, risks, and pricing – of individual investments.

These fundamentals, along with diversification, are the cornerstones of a balanced and sound investment strategy that allows investors to mitigate risks while tapping into key investment trends.

How do you assess the current economic conditions in the Middle East, Asia, Europe, and the US, and what impact do you anticipate these conditions will have on investment strategies?

The current economic landscape is characterised by slowing global growth due to restrictive financial conditions, tight monetary policies, and relatively weak global trade and investment. Ongoing inflation, trade fragmentation, and geopolitical conflicts further contribute to market volatility, compelling investors to adopt a more cautious and selective approach.

Despite these challenges, it is essential to recognise that slowing GDP does not necessarily equate to underperforming markets. Historical analysis by Dimson, Marsh, and Staunton at the London Business School (2013) demonstrates a slightly negative correlation between GDP and equity market returns, highlighting the anticipatory nature of stock markets and the significant impact of valuation on forward-looking returns.

Given the concentration risks present in major US indices such as S&P 500, driven by high valuations of key tech firms or the Magnificent Seven (Apple, Microsoft, Alphabet, Amazon, NVIDIA, Tesla, and META), investors should prioritise diversification.

While the US market may appear robust, emerging markets and underperforming regions might offer compelling opportunities that have been overlooked. By considering global diversification and focusing on valuation, investors can navigate the current economic conditions more effectively and potentially enhance their long-term returns.

SJP entered the UAE market last year. Could you elaborate on the strategic importance of this move?

The UAE has long established its position as a strategic wealth corridor between Asia and Europe, with immense growth potential. The nation’s political stability, international connectivity, favourable business, regulatory tax, and visa policies attract a rapidly growing population of high-net-worth individuals and corporate expatriates, which in turn drives demand for private banking, investment advisory, and other wealth management services.

At a time when there are challenges such as geopolitical realignments and rising economic uncertainty, clients are looking for experts with knowledge across global wealth jurisdictions that can provide tailored and holistic investment advice.

SJP established its first Middle East office in Dubai to bridge the gap in the region for quality, personalised financial advice backed by specialist investment services.

SJP’s clients are increasingly transient, with globalised assets and often a financial foothold in multiple jurisdictions across the world, so this expansion into the Middle East well complements our global business in the UK, Singapore and Hong Kong.

How do you see the global investment landscape changing in the coming years?

Transformative forces such as technological advancements, geopolitical shifts, and sustainability considerations are poised to significantly reshape the global investment landscape in the coming years. For instance, the recent US tariffs on Chinese electric vehicles, and potential similar measures in the EU, highlight how geopolitical tensions might overshadow sustainability goals. This could have immediate impacts on industries and companies involved, potentially escalating into a trade war, which would raise inflationary risks by making goods more expensive for consumers.

Consequently, investors must prioritise diversification to mitigate volatility while also carefully taking into account inflationary risks in asset allocation decisions, noting that persistent negative real interest rates could erode the purchasing power of holdings such as cash and deposits in the medium to long term.

How does SJP incorporate ESG factors into its investment approach?

SJP sees responsible investing as a means to shape a better world and foster sustainability.

We are a signatory to the UN-backed Principles of Responsible Investment (PRI), with an A+ rating, and our investment management approach includes monitoring and mandating our fund managers, fund ranges and companies to integrate ESG principles into their investment process.

As an FTSE100 company with significant funds under management, how does SJP mitigate risk for its clients?

Sound risk management lies at the core of the investment ethos at SJP.

SJP focuses on working with clients to understand their unique financial needs – investment goals, timeframe and drawdown tolerance – and co-creating sound, diversified portfolios tailored to their needs.

To mitigate risks, we typically look to diversify money at three levels: security selection, the mix of fund managers and how we combine these funds into the portfolios. The result is a product with improved diversification across managers and strategies. In time, this smooths out volatility and delivers more consistent performance in a simplified structure. We believe that ensuring clients remain diversified at every level, will help to minimise risk and volatility, without sacrificing long-term returns.

Having said that, it’s important to understand that low volatility doesn’t always mean an asset is safe. Explore and understand the different risks and features of various asset classes, not just volatility, and design a well-rounded portfolio to address all these factors.

Share your outlook on specific asset classes. How do you believe they will perform in the current economic environment?

Considerations for asset classes depend on unique factors such as the investment objectives, timeframe, risk tolerance and overall financial planning profile of each client. For investors with short-term monetary obligations, sitting out market investment may be prudent as time correction risks apply when investing in markets for short periods. For longer-term investors, equities are favoured for long-term growth and inflation protection, with careful mitigation plans around volatility.

Currently, SJP sees that equities tend to be more popular than fixed interest, following the sharp drawdowns of fixed interest we have seen in 2022. By the same token though, this drawdown has brought up bond yields, and we might see bonds re-assume again more of the stabiliser role they have traditionally played in portfolios.

Alternative investments vary largely in risk and return, and it can be difficult to identify consistent performers in this space that do not come with liquidity or other unique risks. In this asset class, direct property ownership can be a good choice for diversification and a good way to complement investment portfolios.

What sectors do you see as particularly promising for investors?

SJP focuses on balanced portfolios across investment styles, including value, quality, and growth, with diverse sector exposure. Pre-2022, we adjusted our portfolio, taking partial profits in growth and increasing exposure to value due to concerns about correction risks. We’re cautious about chasing trends blindly and seeking compelling opportunities overlooked by others.

SJP’s fund managers prioritise individual company evaluation based on thorough due diligence, considering prospects versus valuation. Technology, particularly AI, remains very promising as a sector, but high valuations bolstered by strong market attention may limit current opportunities.

Investors with strong positive views on allocating to such areas should look to global diversification to soften downside risks, particularly in emerging markets with lower-priced firms benefitting from the sector.