Investment interest in cryptocurrencies has hit a new feverish pitch recently. No longer limited to just the retail geek punters of the early days, a growing list of major financial institutions have changed tack — from calling investment in cryptos “Ponzi schemes” just a couple of years ago — to join the action.
However, Swiss bank UBS, which runs the largest wealth management business in the world, is not about to join the fray. “We are not for Bitcoin for various [reasons],” says Edmund Koh, the bank’s Asia Pacific president. “One of them is in the issue of KYC [know your customer] and AML [anti-money laundering]. We are very uncomfortable on the AML side,” says Koh in response to questions about the recent rally.
He adds that the technology underpinning cryptocurrencies is already “well-articulated”. “But the governance of it, together with the capital, is something which we are very uncomfortable with. Who actually owns it, and how the economics of it actually works; those are two sore points for us,” says Koh.
“This house is not for Bitcoin: not five years ago, not now. Maybe when it becomes regulated with more transparency on ownership, that’s when I think we will jump in,” he adds.
Rather, Koh, reflecting UBS’s house view, is seeing better prospects in sectors such as GreenTech, FinTech, 5G and healthcare. “I think these are all the growth industries we should stress on,” he says.
In the third quarter of last year, the bank launched the UBS Advice Premium (Sustainable Investing, or SI). By December, it had already crossed US$300 million ($400 million) in assets under management (AUM). Touted as the first personalised SI advisory, clients receive daily SI-focused advice and reporting tailored to their preferences.
This new product is part of UBS’ SI offerings, which has more than US$2.5 billion in AUM, of which, in a sign of growing interest, US$1 billion was added in 2H2020 alone.
As part of this whole sustainability trend, alternative energy sources, like wind power, will become increasingly essential. “Sustainability is one of our preferred recommendations to clients. In Asia, clients want to do good for their environment and they want returns. We’ve been able to deliver both,” claims Koh.
In addition, he believes Covid-19 has accelerated the adoption of technology, shortening the runway for electric vehicles and 5G-enabled robotics to enter the mainstream market. “We think that production for electric cars in this decade in China will be 10 times the output today,” says Koh.
Among the industries supplementing the projected rise in electric vehicles is the electronics industry, and therein lies the opportunity for Asia. “The electronics industry is interesting; there are supply chain disruptions. [The industry must] look at new geographies to kickstart their businesses again,” Koh says, naming Vietnam as a potential beneficiary.
Cold storage and warehousing is another potential area for growth, he notes. “There’s enough food production in Asia, but there’s not enough storage.”
He highlights China’s cold chain network, the temperature-controlled supply chain of refrigerated production, storage and distribution of fresh food, as one to watch. “In China, they are looking at replacing wet markets with more hygienic shopfronts, with cold storage facilities in the back.”
On the other hand, traditional industries in the travel and retail sectors have been dealt a bad hand by the pandemic. “Instead of hoping things will go back to what they were, they should look at the current situation as an opportunity to accelerate new forms of investment and new ways of doing business, in order to profit from this position,” says Koh.
That said, the travel industry is due for consolidation, says Koh. “Some of the brands will go away, they will be taken over because they can’t survive on their own… The existing players will have to make acquisitions.”
Global outlook
With vaccinations underway, Koh believes Asian economies will rebound quickly in 2021. “The vaccination programmes will be significant in creating a better outlook when the summer quarter comes in,” he says.
According to Koh, the bank’s forecasts place the global rebound at 5.3%, the Eurozone at 5.2% and the US at 3.3%. China, meanwhile, is expected to stage a strong rebound of between 7.5% and 8.2% this year, thanks partly to the low base of 2020.
However, Koh warns that the US dollar will weaken with the fiscal and monetary policies outlined by newly appointed US treasury secretary Janet Yellen. “On the American side, I think it will rebound quite strongly,” Koh adds. “In that context, we are still bullish on equities, bond markets and credit markets.”
Despite a victory by Joe Biden for the US’ Democratic Party, Koh believes that trade tensions between the US and China will persist, though on a smaller scale. “I think that you will find more acceptance and stability in this tension. It’s more predictable, less acrimonious. Generally, a market that is less volatile.”
Strong earnings growth
Interestingly, with all these big shifts across industries and unprecedented volatility experienced by the markets last year, UBS’ own business was hardly affected.
On the contrary, it reported handsome earnings of US$1.71 billion for its 4QFY2020, nearly double the US$966 million analysts were expecting.
During the quarter, the bank’s global wealth management business reported profit before tax of US$936 million, up 22% y-o-y, as clients entrust bigger sums of money to the bank to manage, thereby generating higher fee income for UBS.
Besides wealth management, UBS has other businesses in asset management, corporate and personal banking, and investment banking too.
Across the board, strong lending and trading among its wealthy and ultra-wealthy clients, coupled with a surge in investment banking activity all helped lift the bottom line.
The improved numbers are somewhat reflected in UBS’s share price. From the recent low of just over CHF7 ($10.30) in March last year, UBS shares closed at CHF13.30 on Feb 2, equivalent to 8.04 times earnings. At this level, UBS has a market capitalisation of CHF51.3 billion.
For Asia Pacific as a whole, UBS’ profit before tax doubled from US$1 billion to US$2.2 billion for FY2020 — crossing the US$2 billion mark for the first time.
Five years ago, the region’s contribution to the bank’s total operating profit was 14%. Come FY2020, it had reached a quarter. “It is just phenomenal,” says Koh, who, in 2019, was the first Singaporean to be appointed to his role.
UBS’s wealth management business in Asia Pacific had a good year, as it continued to outperform its counterparts in other major markets, with a profit before tax of US$1.06 billion for FY2020, up 89% y-o-y from US$560 million reported for FY2019.
In contrast, the wealth management in Switzerland, the bank’s home market, grew by 11% y-o-y in the same period; for Europe, Middle East and Africa, up 10% y-o-y; and the Americas trailing at 7% y-o-y.
Clients in this region are handing ever copious amounts of money to the care of UBS wealth management. Between FY2019 and FY2020, Asia Pacific AUM grew from US$450 billion to US$560 billion. “Having been in this business for 32 years, US$110 billion growth in AUM in one year is, to me, just unheard of. I’m very proud of it,” says Koh. “Overall, a very good year for UBS Asia-Pacific.”
Pregnant pause
What were the reasons that drove this seemingly counterintuitive trend? With borders shut and many industries grinding to a halt, UBS’ wealth customers found time in 2020 to reassess their portfolios.
“Because two thirds of our clients are entrepreneurs, they spent a lot of time travelling. This period gave them time to reflect on their portfolio and recalibrate. We took the opportunity to review their portfolios further, resulting in AUM growing stronger and deeper with us,” Koh explains.
According to Koh, UBS was one of the earliest banks that enabled working from home. “When you work from home, it’s not just connecting from home via Zoom or Skype. It’s about the quality of your client transaction [and] providing a secure space to enable those transactions. So that helped us tremendously boost confidence,” he says.
In December, the UBS Singapore office left the CBD and began moving into its new premises on 9 Penang Road. Delayed due to Covid-19, the move consolidates more than 3,000 employees formerly spread between One Raffles Quay and Suntec City. UBS Singapore also has in Changi its technology and operations hub, located within Hansa Point.
“It’s not just a physical move. We have re-engineered the whole way we work, from operations to technology, all the way to our people in the frontline. Knowing that everyone is in this building; it’s just convenient,” says Koh.
