Flexibility – The key to navigating a crisis

For many, the Covid-19 crisis has brought their personal values into perspective. Security is a key priority for many wealthy individuals; to protect their family and their assets while there is uncertainty about the future. On the other hand, those with a keen appetite for risk are seeking high-growth opportunities.

Deepening economic uncertainty

Before Covid-19, trade wars and slowing economic growth were already creating uncertainty in the global economy, but the world was not prepared for a near-global lockdown. In less than one month, the MSCI World Index dropped by 30%. McKinsey predicts that GDP growth for 2020 could slow to between 0.5% and 0.9% if social distancing measures remain in place for much of the year.¹

For high-net-worth individuals, a decline in global markets will have a significant impact on their wealth. Most wealthy individuals own a business – or a large stake in one – which will have shrunk the value of their assets. In fact, ten of the world’s richest billionaires lost a combined $38 billion as a result of the outbreak.²

Judging by previous health crises, economies should bounce back once the pandemic ends and wealth should recover over the long term. But there is no guarantee if or when this will happen. In addition, the way in which an individual’s wealth is affected will largely depend on how different governments respond to the virus.

Although many aspects of people’s lives are out of their control at the moment, solutions that offer flexibility are enabling individuals to make choices about their wealth.

The importance of long-term planning

Businesses and families are facing liquidity challenges as a result of the Covid-19 outbreak. According to Daniel Ahn, chief US economist at BNP Paribas, the financial system should have the liquidity to act as a bridge loan for the crisis. However, he points out that uncertainty about how the virus will develop and the sectors that will be most vulnerable is damaging the system’s resilience. ³ 

Wealthy individuals need some liquid assets in order to adapt to the challenges of the crisis. Asset allocation data shows that very-high-net-worth individuals generally hold just less than 50% of their wealth in liquid assets, which will no doubt provide some reassurance that they can access cash when they need it. 

Billionaires, on the other hand, hold just over a quarter of their wealth in liquid assets, with most of it invested in traditionally higher growth funds.⁴ They may therefore be considering how to increase their proportion of liquid assets while the crisis continues. Products that offer growth potential and the option to access assets should become increasingly attractive.

Countering wealth preservation challenges

Many individuals will have benefited from taking a long-term view and protecting their wealth before the Covid-19 outbreak. As a response to trade tensions and slowing economic growth, 20% of ultra-high-net-worth individuals moved assets into safe havens before the financial impacts of the outbreak took shape.⁵ We may see more wealthy individuals making long-term planning decisions in response to the crisis, now or in the future, and they will need financial products with flexibility to do so.

The need to diversify portfolios in terms of geography and sectors as well as asset classes is another vital tool for futureproofing assets⁶ against unforeseen circumstances. Again, flexibility will be essential for reassessing investments when there is a clearer picture of how markets are performing post-virus.

Where there is risk there is opportunity

As well as creating long-term asset security, some wealthy individuals are recognising the opportunities of the crisis. Those willing to take a risk with new investments could benefit from a considerable pay off. Amidst market volatility, some sectors are experiencing unprecedented growth. Unsurprisingly, pharmaceutical and healthcare companies are in high demand, especially those dealing with Covid-19.

In the technology sector, businesses that are supporting remote working, exercise from home, entertainment and connectivity to loved ones are also in demand. Likewise, online delivery and food takeaway services are seeing significant success. In many sectors, the pockets of growth are small but substantial. For example, although many construction firms are pausing projects, others are being commissioned to build hospitals in a matter of days.

Short-term investments in companies that are experiencing rocketing demand due to the outbreak could provide a relatively quick and significant return. Solutions that allow people to capitalise on the opportunities that arise will play a major part in enabling self-determination during the crisis. 

The need for freedom of choice

Personal values will, and indeed should, play a major role in managing finances during the Covid-19 outbreak. Many will seek confidence by accessing or future-proofing their assets, while others will be looking for opportunities for growth and will need to act quickly. As the crisis develops, some may also change their minds about how they control their assets.

Sources:

[1] https://www.mckinsey.com/industries/financial-services/our-insights/wealth-management-in-asia-navigating-the-impact-of-coronavirus
[2] https://www.forbes.com/sites/oliverwilliams1/2020/03/12/how-to-win-against-coronavirus-wealth-managers-take-their-positions/#ef2039223efc
[3] https://cib.bnpparibas.com/think/coronavirus-the-science-the-markets-and-the-liquidity-challenge_a-1-3449.html
[4] https://www.wealthx.com/wp-content/uploads/2020/02/Wealth-X_VHNW-Handbook-2020.pdf
[5] https://www.forbes.com/sites/oliverwilliams1/2020/03/12/how-to-win-against-coronavirus-wealth-managers-take-their-positions/#673c6d5f23ef
[6] https://www.swisslife-global.com/global-private-wealth/resources/insights-gpw/times-of-change.html