The Shift to ‘Safe’ Assets in Asia
In turbulent times, there is a natural appetite for investments perceived to offer safety. For many, gut instinct – and the reassurance of tangible assets – will lead them towards cash and real estate. Globally, 24% of entrepreneurial wealth sits in these two asset classes.
However, in their search for safety, there is a possibility that they may be overlooking some of the specific risks posed by these portfolio choices. Such is the hunger for property that it is considered by only 15% to be “very risky”. Strikingly, this is lower than those who would say the same about cash [Figure 3].
Across the world, more than half of successful entrepreneurs affirm they find cash and real estate to be “not that risky”. 47% make the same assessment about fixed income.
European entrepreneurs are more likely to perceive asset classes such as stocks, fixed income, cash, real estate and angel investments as “very risky” than other parts of the world.
Florent Bronès is Chief Investment Officer for BNP Paribas Wealth Management. He comments:
"Financial conditions for real estate are very friendly at the moment, but it’s a misunderstanding to say there are no (or limited) risks because of course there are. People underestimate the cyclical nature of real estate.
Think about the global financial crisis – it’s a very long cycle, and sooner or later this risk will come back. Last time we had a decline in real estate prices was 2008/2009 – it was a small decline, for a brief period. In the UK, there were several cycles of decline, but again brief ones.”
Across Asia, optimistic risk assessments of real estate are particularly widespread. For example, in Taiwan faith in bricks and mortar has pushed typical allocations to real estate significantly higher than the global average (17% of liquid assets).
For an explanation, observe that just 8% in Taiwan believe that this poses any real threat to their portfolio. In India and Indonesia, more than seven out of ten say real estate is low-risk.
Garth Bregman is Head of Investment Services for BNP Paribas Wealth Management in Asia-Pacific. He observes:
"Asian clients who have invested in bricks and mortar have generally come out of the experience having made significant amounts of money. This is evident when you start to look more closely at sources of entrepreneurial wealth – for example, the owner of a garment business will have benefited not just from growth in garment sales but also from owning the land on which the factories are built - this land will have boomed in value since purchase, possibly many decades ago.
Real estate does create wealth, and it may be tempting to see it as a perfect asset class providing both growing income and capital appreciation. But real estate markets do still follow cycles and can suffer significant negative shocks.”
This preference appears to be generational with almost two thirds (63%) of Boomerpreneurs agreeing real estate is not that risky. Millennials and Gen-X, who came of age during the global financial crisis – triggered in 2007 by a meltdown in the sub-prime mortgage market – appear less assured [Figure 4].
A contrasting viewpoint can be found in Europe, where entrepreneurs are four times more likely than those in Asia to perceive real estate to be highly risky, particularly in the Netherlands (39%), Luxembourg (31%), Switzerland (27%), Germany (26%) and Italy (26%).
The hunt for safety has a notable impact on investment decision-making across the region. In Asia, cash really is king: in fact, average allocations to cash now draw level with equities (both at 15%).
These choices have mostly been made by Ultrapreneurs in the region, who have invested heavily in their own business rather than the public markets and seek diversification. Indeed, in Hong Kong, cash now represents the second highest portfolio allocation. This is extraordinary to consider, given these particular entrepreneurs have average liquid assets aggregating to USD47 million.
Anton Wong is Head of Key Client Group (Asia Pacific) for BNP Paribas Wealth Management. He provides an explanation for the client mindset on cash in that region:
"Cash has been losing value in many jurisdictions and clients realise they don’t earn very much – or might even lose out by holding cash, with negative interest rates – but at least you have certainty."
"Certainty is what some people value. This is especially true for entrepreneurs who need the liquidity to manage potential demands from their businesses. Everything else introduces additional uncertainties.”