SINGAPORE (Nikkei Markets) -- Equities still offer the best chance to make money in a low interest rate environment but private banks catering to the wealthy in Asia are increasingly recommending stock options and gold as a hedge against any sharp pullback.
The advice comes amid a growing tendency on the part of skittish investors to hold large amounts of cash or low-yielding bonds. While valuations have surged after the decade-long stock market rally, concerns about developments in the Middle East and the ongoing trade war between the U.S. and China have grown, pinning wealthy clients to the sidelines.
DBS Private Bank said there is "no alternative" to stocks given expectations that interest rates and bond yields will remain at ultra-low levels. Citi Private Bank said clients should not try to time their investments, noting that geopolitical events have typically had a short-term impact on share prices.
Persistent skepticism has led to under-invested portfolios, said Hou Wey Fook, chief investment officer for DBS Group Holdings' consumer banking and wealth management businesses. "Should the market stay resilient, portfolios that are sitting on excess cash levels may have little choice but to get back in," Hou added.
Tan Min Lan, head of the Asia Pacific Investment Office at UBS, the region's largest wealth manager, recommends that Asian clients stay invested in stocks and protect against downside risks through options, which allow two-way bets on the market's direction, or by sticking to companies that pay relatively high dividends.
Fuelled by rapid economic growth over the past two decades, Asia's rich have become a major influence in global financial markets. The Asia-Pacific is now home to more billionaires than North America or Europe. Asian Private Banker, an industry publication, estimates the region's 20 largest private banks managed some $1.63 trillion worth of assets at the end of 2018.
That figure has probably grown over the past year as stock and bond markets rallied across the globe. For example, the S&P 500, which tracks U.S. stocks, soared 29% last year as three rate cuts by the Federal Reserve offset concerns about the slowing global economy and tensions between Washington and Beijing.
The Euro Stoxx index climbed 23%, while the Shanghai Composite and the Nikkei 225 gained 22% and 18%, respectively.
DBS's Hou said history has shown that fighting the Fed is a futile exercise and stock investors should take their cue from central banks.
However, despite the broad preference for equities, banks disagree on the sectors in which to invest.
For example, while the growth in Asian consumption and the opportunities presented by 5G telecom networks are recurrent themes, views differ on European oil companies like Royal Dutch Shell and Total that pay high dividends and are touted by some as an alternative to investment-grade bonds.
The switch to high dividend stocks marks a change from the traditional approach wherein government bonds were used to balance riskier assets in a portfolio.
In Citi's view, it would be better to seek dividends from other companies given the disruption in the energy sector due to the rise of cleaner and greener sources of power.
DBS also differed from its counterparts in highlighting the rising popularity of e-sports among millennials as a new investment theme, a trend that would benefit companies such as Nintendo, Sony and Tencent Holdings.
To guard against unexpected developments, private banks are advising investors to hold more gold as well as alternatives like hedge funds that can employ a number of strategies to generate positive returns even in falling markets.
Willem Sels, global chief market strategist at HSBC Private Banking, said HSBC has been overweight on gold for some time due to the greater political uncertainty, which could worsen this year with elections due in many countries.
"With U.S. Treasury yields already so low, gold is the asset most likely to spike should people run for cover," he said, alluding to interest rates that have little room to fall further.
HSBC recommends hedge funds as part of a core allocation as their performance tends to be independent of the economic cycle.
"Volatility creates opportunities for them," Sels said.
-- Kevin Lim