Asian equities lost up to $3.5t in investor wealth due to pandemic

Safeguarding wealth and low-risk assets will be investors’ focus.

Banks may have to rethink their strategy of relying on wealth management as a key driver of growth in the next few years, as the coronavirus pandemic and succession of country lockdowns has taken a massive hit on this strategy. Investor wealth in Asian equity markets declined by approximately 10-15% between February 1 to April 15, or a loss of $2.5t to $3.5t, a report by McKinsey & Co. found.

Whilst the recovery of the Chinese market—which account for approximately 35-40% of PFA in Asia—bodes well for the region’s wealth-management industry, the region is not out of the woods yet, the report noted. Asian wealth-management businesses must learn to adapt to the new normal through increased emphasis on operational risk, adoption of digital tools and data analytics, industry consolidation, and the transition to client-centric advisory, says McKinsey.

Amidst the current market volatility, McKinsey expects an uptick in execution-related trades amongst investors seeking to take advantage of the volatility. Investors are also likely move to cash and other low-risk assets, especially those seeking to reduce exposure to capital market losses.

Demand for advisory services may rise again in the mid to long term as investors seek to stabilize their portfolio.

“Over the mid to long term, however, some investors will seek to stabilize the performance of their portfolios through professional advisory. Others, whose trust in financial advisors and possibly the entire financial system could weaken in response to the current crisis, may prefer to seek self-guided advisory,” the report stated.

“In either case, wealth managers may see an opportunity to provide tailored, customer-centric advisory and discretionary services as an add-on to their existing execution-based offerings,” added McKinsey.

Investors who were compelled to increase their use of digital will in all likelihood recognize the advantages of digital interactions and shift from “branch first” to “digital first” ways of engaging with managers and customer service representatives. This meant that banks must ensure that their digital servicing capabilities are up to par with the demands of their clients, such as in portfolio advisory and execution capabilities.

“Regulators may require wealth managers not only to strengthen business continuity plans but also potentially to set aside capital for any similar future scenarios bearing implications for firms’ fiduciary obligations,” the report said.

Industry consolidation is also becoming likely due to the pandemic, which has already taken a toll on small firms and fintechs. Lower valuations amid market turmoil may present acquiring firms with an opportunity to increase scale, gain new capabilities, or enter new markets

Onshore markets are also expected to grow faster than offshore markets, with the pandemic providing incentive for customers to keep their wealth close at hand.\

“Diverse regulations, including common disclosure requirements and tax amnesty programs, have already accelerated this shift, with onshore assets under management (AUM) increasing from 43% to 46% of total Asian high net worth AUM between 2016 and 2019. As a consequence of the COVID-19 crisis, we expect that customers will be increasingly inclined to keep wealth close at hand while balancing offshore diversification,” the report said.