Gofran Chowdhury is Head of Investment Specialists at Citi Australia.
GH: How have your clients changed their investment patterns over the past six months?
GC: Since COVID hit, investors have become a lot more conservative with their portfolios, they are looking for more certainty. Previously, investors were keen on exposure to equities, but now, there is more in fixed income. Our investors benefited from wider credit spreads when interest rates were higher than now. As the market recovered recently, their bond valuations rose, and they have invested more. We saw a 44% increase in fixed income investment in Q1 and Q2 of 2020 versus Q1 and Q2 2019.
People were also worried that interest rates were going to zero, so they locked in an income that pays say 3%. We also saw a big jump in term deposit investments even at low rates, including investors who sold their equity portfolio in February and March and were holding cash on the sidelines waiting for an opportunity.
GH: What’s an example of the bonds they have been buying?
GC: The most popular Australian bond during COVID was Coles 2029 paying around 2.8% or 2.9%. At that time, term deposits were paying 1% to 2%. A lot of people realised, especially with the run on toilet paper and pasta, that no matter what happens, shoppers still need to go to the supermarket. We also saw demand for Dell 2026 and Dell 2029 offshore, as part of the technology theme around the fact that people are working remotely, using technology more. So another behaviour change we have seen is investors looking for names that will make money during a pandemic.
GH: And has that continued since the low of March?
GC: There was a change in May and June, when we saw some clients looking for investments that would perform well post the pandemic, the early enablers of the economic recovery, such as resource stocks like BHP and Rio. The thought process was the fact that once we come out of this pandemic, governments will move heavily on infrastructure investments, generating demand for resources.
However, more recently into July, the second virus wave in Victoria and other countries had an immediate impact that surprised us. A lot of investors started to buy US dollars as a safe haven currency and a diversification strategy, although they don't earn a lot of interest. They see the US dollar as a natural hedge to the Australian equity markets, so if there is a correction in equity markets, the US dollar tends to hold its value.
Our investors were also seeking US dollar investments in the fixed income space. It surprised us because traditionally Australians tend to invest in Australian names.
GH: But did your clients see March as an equity buying opportunity and participate in the subsequent rally?
GC: There has been a lot of talk about the rise of retail investors going into the stock market, and we did have some clients looking for growth assets. But more generally, our clients don't think that the worst impact of COVID is over. They certainly don't see a straight-line growth from here, so they were looking to protect the downside as well using tailored investments.
GH: Do your clients believe there is a disconnect between low bond markets and strong equity markets?
GC: Our clients realise the market is flush with cash, driven by liquidity. Central banks are pumping money in, and some clients are worried it will lead to inflation. I like to use the example of a chair with one of its four legs missing. Although you can sit on a chair which has three legs, it might be shaky. The fourth leg needed by the economy is the drugs and vaccines to control COVID-19. Until there is medical success, our investors are cautious of this rally.
GH: Tell us more about these tailored investments you mentioned.
GC: We take the client’s view on the market and build something to back that view. Usually, they want certainty but they don’t want to time the market. They don't think they are fund managers, but we build a predefined payoff that backs their view. An example last month was clients believing the market will rise over the next five years but they wanted downside protection over the first year. So we tailored a deal which participates in the upside and limits the downside.
Another popular one recently was built around the uncertainty of bank dividends, which are a big part of Citi’s client portfolios. Even if the dividends go down, they want a consistent income stream. Sometimes clients ask for Citi’s view and we build something around that. For example, Citi is bullish on certain tech sectors, so we have a payoff whereby a client can participate in 125% of the positive performance of tech giants Amazon, Apple and Google. The payoff enables the investor to get more than just the 1:1 return they would receive by buying the equity direct and on the downside have a 40% barrier to protect against volatility.
GH: In your wealth management business, have you faced the same issues as the big Australian banks with conflicts of interest in a vertical integration model?
GC: Our focus is on open architecture, so generally, we are not a business in Australia that manufactures its own funds management products. We've seen our friends in the big four struggle with that business model. We have a global capability to access securities which clients can't get from our competitors. For example, we have one of the largest spectrums of bonds and access to every issue we want. We distribute in all the markets Citi operates.
GH: What's the platform that your clients’ investments sit on to make the administration and monitoring and management of those investments easier. Do you offer any of the major Australian platforms or managed accounts?
GC: Again, unlike our competitors, we have our own platform fully integrated with client banking, and we don't charge a platform fee. The reason we are able to do that is that the platform is the same for clients in Singapore or Hong Kong or wherever. Many clients invest and live in multiple geographies so all their wealth can be viewed in one place. Having said that, it does not have all the features and flexibility of some of the local players.
GH: If a wealthy couple comes to see you for the first time, embarking on an investment journey to finance say 30 years of retirement, what's the first question you ask? How does the conversation start?
GC: It's a great question. If someone's looking at a 30-year plan, first we want to understand if they're coming to us for investments or they're coming for advice. We don't provide personal advice, we operate in the wholesale investment space. We are keen to educate and give a good understanding of the markets, but we refer them to a financial planner externally for advice. We want our clients to be comfortable making their own decisions. So the first questions are normally about their knowledge and experience.
GH: Assuming a person understands a reasonable amount about the market and they've had some financial advice, how does the investment conversation start?
GC: We try to understand what problem the client is trying to solve and what is their view. We will provide the options. We operate like a co-pilot and the client is still piloting the plane. We don’t make the decisions. Many of our clients are successful in other fields and confident making their own decisions.
GH: Last question. What is Citi’s view on recovery from the pandemic and vaccines?
GC: Our base case is a U-shaped recovery. We think we’ll be in these difficult conditions longer than many others expect. The adverse long-term impact on many sectors such as airlines and travel will be huge. We thought there would be a second wave and that is now happening. We’ve been impressed by the collaborative efforts from governments and central banks, both fiscal and monetary policy. There will be a lot of structural changes in future as well.
Graham Hand is Managing Editor of Firstlinks. Gofran Chowdhury is Head of Investment Specialists at Citi Australia, a sponsor of Firstlinks. This article is general information and does consider the circumstances of any investor.
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