The start of 2021 unleashed a wave of optimism, anticipating the year to be a significant improvement on the one preceding it. While it is not quite working out that way, market conditions facing European investors are at least clearer since the start of the crisis in March 2020.
In this article, we draw on survey data collected by Aon with 555 ultra-high net worth entrepreneurs and families across 11 European markets for the 2021 BNP Paribas Global Entrepreneur & Family Report. We consider how European investors adapted their portfolio choices in response to crisis conditions, the market risks they perceive on the horizon and which investment themes they find most promising as they pursue growth.
Equities in favour
Despite the frequent spikes of volatility witnessed over the last 12–18 months, European business owners barely changed their portfolio exposure to equities, from an average of 20 per cent in early 2020 to 19 per cent in 2021.
In fact, this year marked the third in a row where equities were the preferred asset class in Europe ahead of investments in their own businesses. France and Poland were the only visible European exceptions to the trend, with entrepreneurs allocating more than a fifth of their investable wealth to equities.
Cash has long been considered a safe asset globally, with only 23 per cent of European investors judging this to be a ‘very risky’ part of their portfolio before the pandemic. This attitude did, however, translate into tangible action, as 28 per cent reduced their exposure to cash over the course of the crisis.
Even now, while the majority (55 per cent) agree they hold roughly ‘the right amount in cash’, 30 per cent fret that their cash position remains excessive – the highest of any region.
Inflation fears
One of the reasons entrepreneurs are wary about cash is the investment climate. Unprecedented fiscal stimulus, abnormally high household savings ratios and supply chain challenges are increasing the likelihood of a spike in inflation. In Europe and the GCC, it is their number one concern about today’s investment climate. In the US, stockmarket volatility is a bigger preoccupation, while in Asia-Pacific, it is high levels of corporate indebtedness.
At the same time, investors see many opportunities for wealth creation on the horizon from a global economy in a state of flux, and their behaviours are changing to take advantage of these.
For the wealthiest entrepreneurs, private equity and real estate offer distinct advantages during prolonged uncertainty, including higher returns than mutual funds, a hedge against inflation and the prospect of efficient transfer to the next generation.
Entrepreneurs and families in this region are also increasingly comfortable using credit solutions to support their businesses.
New opportunities
Significant change brings new opportunities, building on trends that have been accelerated in the pandemic-era. Most European entrepreneurs are adjusting their investment strategies in favour of growth.
In Europe, many businesses have been forced, or convinced, to undertake a rapid digital transformation, now seeking to understand this theme in much greater depth. Forty-six per cent are already enabling new technologies in their businesses or gaining exposure to new developments through their portfolios.
At the same time, their portfolio strategies must adjust to an era of persistently low (or negative) interest rates, so it is no wonder that expertise and advice on this topic is in high demand.
Finally, the importance of the energy transition and the ‘green deal’ proposed by European policy-makers for economic recovery is prompting a change in behaviours and attitudes: 42 per cent have already taken some action in relation to their businesses and investments.
Conclusion
In the face of a crisis without comparison, Europe’s wealthy entrepreneurs and families did not panic. Instead, they re-evaluated which asset classes offer them the best risk-returns profile. Equities, private equity and real estate, as well as credit solutions, have all remained appealing despite the uncertainty, offering distinct advantages to particular segments.
The question of where to invest has no easy answers, but growth strategies are popular across the region. While there are several compelling themes to help inspire and guide decisions, these will need to be carefully balanced with the looming concern about market conditions and the changing tax and regulatory environments.
Caroline Burkart is associate partner and Tasha Vashisht director at Aon Human Capital Solutions
