China HNWIs dangerously overconfident: Julius Baer
A strong entrepreneurial spirit has made Chinese high-net-worth individuals (HNWIs) dangerously overconfident about meeting unrealistic investment goals, warn executives at Julius Baer.
That was one conclusion from management at the Swiss private bank, which with partner Bank of China conducted a survey of 200 high-net-worth clients across 30 BOC private banking branches across the country.
When asked how confident they were in achieving their investment returns, one in five respondents said they were very confident and a further 44% were confident – representing a powerful 63% block. Only 4% were not confident (see Figure 1). That comes despite the nation’s slowing economic growth.
Interestingly, a majority (57%) of respondents were entrepreneurs, while 20% described themselves as freelancing, 16% as executives and only 2% as professional investors.
“The respondents are mainly entrepreneurs who got rich on their own. Their high confidence reflects how they look at investments,” said Thomas Meier, head of Asia at Julius Baer. “That is sometimes dangerous because financial markets do not behave the same way as the business they are running.”
Kaven Leung, Julius Baer’s head of North Asia at Julius Baer, attributed such confidence to lack of investment experience. “Once they [HNWIs] become more familiar with the reality of the cycle, they will start to understand that financial markets can go up and down,” he said.
But this outlook will likely put pressure on private banks in China and could lead to client disillusionment. Asked what they looked for when selecting a private bank, the joint-top answer with 53% was investment returns and value-added services.
Respondents were least likely to be swayed by having an existing relationship or recommendations from friends or family. “They seek to find out for themselves whether the products and services are suitable and are therefore likely to evaluate several banks before choosing their primary bank relationship,” suggested Leung.
To achieve their investment goals they have an aggressive risk appetite. They listed their favoured investments as structured products (87%), equity funds (63%) and real estate (60%), while private equity (17%) foreign stocks (15%), commodities (7%) and futures (4%) were least popular.
At the same time it appeared that respondents were looking at investments on a standalone, absolute return basis more often than a portfolio context. Asked what they sought to achieve with their investment returns, 81% said maintain standard of living, ahead of preparing for children’s future or accumulating capital for their business.
Asked what investments they would consider over the next 12 months, again structured products ranked first, followed by foreign exchange, bonds, art and antiques and foreign stocks.
Yet overseas financial investing (44%) was listed as the most popular choice when respondents were asked what their cross-border interests would be over the next 12 months.
Also prominent was buying an overseas property (40%), while financing overseas education (32%) and emigration (28%) remained relevant.
There was little interest among Chinese HNWIs for expanding their existing business overseas, although a little over one in 10 said they had no plans to explore cross-border interests.
In terms of international investment destination, the overwhelming favourite with 61% was North America, followed by 34% for Hong Kong, 21% for Australia and 15% for Europe. Bottom of the pile was emerging markets ex-China (5%), Japan (4%) and Taiwan at 2% (see Figure 3).
“In terms of preferred investment destinations, you can see their choices … have to do with where they want their kids to be educated. The choices for education, property and financial investment destination are correlated,” observed Meier.
In a separate survey, BOC Private Bank and Julius Baer polled 829 affluent parents residing in Beijing, Hong Kong, Mumbai, Shanghai and Singapore on their attitudes to education and investing in their children’s future.
The findings showed that parents in Beijing and Shanghai (98%) had the highest expectations that their children would achieve higher education. They (66%) also had the clearest preference for overseas education.
Parents in Mumbai (91%), Beijing and Shanghai (88%) have the strongest expectation that their children would enjoy higher incomes than they did. Parents in Mumbai set aside the largest share of their monthly incomes to finance current and future education needs, averaging 16.7% of monthly income.
In China, parents save an average of 14.4% of their monthly household income for their future children’s education, while in Singapore its 12.9% and Hong Kong 11.6%.
In addition, BOC Private Bank and Julius Baer launched a lifestyle index for China to help investors gauge consumption trends across four in-country economic zones covering 12 major cities in China.
It compared the price moves of a basket of goods and services including domestic first-class travel; the cost of registering a new business; dental implants; a hospital stay; golf club membership; hotel suites; high-end property and a wedding banquet.
Average costs were highest in the Bohai economic rim, home to Beijing, Tianjin and Dalian, followed by the Yangtze River Delta, Pearl River delta and Western China emerging zone.
In terms of 2013 per capita disposable income, Shanghai remained top, followed by Beijing and Guangzhou, Jiangmen and Huizhou. Chengdu in the Western Economic Zone came bottom.