What Goldman's China Strategist Recommends -- Barron's Asia

By Abby Schultz

When you talk to a banker at Goldman Sachs Private Wealth Management about how to manage the money you haven't thrown into growing your business, the conversation is likely to turn to how to diversify your wealth, and how to keep it safe and liquid.

That's because many of Goldman's private wealth customers -- people who have at least US$100 million in investable assets -- are pretty good at snagging huge returns from their business. Safety isn't a word they usually associate with capital they have on hand to invest. Yet, what many of Asia's wealthy need to do now is preserve wealth for their families. As China's economy slows and the property market cools, more of Goldman's customers in China -- who represent about two-thirds of the Asia private bank's business -- are ready to hear and act on this advice.

"The number one thing is safety, low risk," says Jiming Ha, chief investment strategist for China at Goldman's private bank. "Now they are starting to realize there's an important element in this investment philosophy, given that domestically things aren't as bright."

If you're a Goldman customer in what some call the ultra-high net worth echelon, chances are what you need out of your investments may not be typical. And that's where the conversation begins -- about what you need or want out of your wealth. For example, if you're funding a charity, you may want to put some of your money in securities that generate predictable income, like bonds. If you're creating a family trust, you may be more interested in stocks with a stable growth outlook, says Bryce Wan, head of the portfolio management group in Asia at Goldman Private Wealth.

What you'll end up with is a bespoke portfolio that draws from the firm's technical and strategic research from across the globe, including a team of seven investment strategists led by Ha in Asia.

Since 2010, Goldman has recommended a tactical overweight position in U.S. large-cap banks. One reason is U.S. bank capital leverage ratios are now about eight times assets, which is very low compared with 13 times or more just before the financial crisis, Ha says. "We think financial institutions are already in a position to re-leverage," he says. "And alongside the pick-up in economic growth in the U.S., we think the financial system will benefit."

Meanwhile, the bank reduced a two-year overweight position in large-cap pan-European stocks to neutral in the second quarter. Goldman doesn't recommend backing away from European stocks altogether. The sector should return 10% over the next three to five years, Wan says. Goldman's tactical tilt within this neutral stance is to overweight Spanish stocks and underweight French stocks, given the slow pace of economic reform in France.

The firm is not upbeat about emerging market stocks either. It's neutral on the sector, and it closed an overweight tilt toward Indian stocks after the market appreciated in the wake of business reformist Narendra Modi's election in May. Indian stocks are already up 32% so far this year.

In February, Goldman also recommended avoiding copper. That call reflects a slowdown in China's economy, but also the realization that copper speculators within China are unwinding complex bets on the metal's rise. Recently, it also recommended leaning away from gold.

In fixed income, Goldman is recommending that customers underweight investment-grade bonds, believing they are fully valued, but they still like U.S. high yield, a position they have held since deep in the financial crisis in 2008. The firm no longer likes local currency bonds from Asia, given that they only give customers a roughly one percentage point pick-up over U.S. high-yield, which is not enough to pay for the risk. And while clients will often ask about U.S. dollar-denominated bonds issued out of Asia, Goldman isn't a big fan. Bonds from high-quality Chinese state-owned enterprises don't offer enough yield, and higher-yielding Asia bonds denominated in U.S. dollars often are too risky.

Ha also steers any customers who ask away from so-called shadow banking investments - essentially non-bank products bought In China that are often opaque in nature, but can carry returns in the high teens. Ha forecasts China's economic growth will slow to about 7% in 2015 and 6% over the medium term. Customers start to realize that "some of the products probably carry interest rates that are much higher" than the risk level they can take.

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