Private banking outlook 2014: Extended interviews with CIOs of five of the leading global wealth managers
How can private banking CIOs cement their positions as key drivers of the wealth management business? And to what extent are they able to differentiate their strategies to clients? Euromoney attempts to shine some light on these challenges by asking the chief investment officers of five of the world’s biggest wealth managers for their views on how to beat the market in 2014 and beyond. Their responses suggest that differentiation will come at the margins, at best.
Thomas Moore, chief market strategist, HSBC Private Bank
Moore joined HSBC in 2001 from his role as CIO at JPMorgan Chase’s personal asset management group.
Michael Strobaek, global chief investment officer, Credit Suisse
Strobaek joined Credit Suisse in May 2013 from a Swiss family office, where he was the CEO, the CIO and a managing partner. Between 1996 and 2009 he was with UBS.
Richard Madigan, CIO, JPMorgan Private Bank
Madigan took on his role in April 2012 having joined JP Morgan in 2004. Before that he was head of emerging markets investments at Offitbank.
Alex Friedman, Global CIO, UBS Wealth Management
Friedman joined UBS in March 2011, from his former role as CFO for the Bill and Melinda Gates Foundation.
Steven Wieting, global chief investment strategist, Citi Private Bank
Wieting took on the role in May 2013 and was formerly a director and US economist in Citi Research. He joined Smith Barney in 1996 and became lead economist for Citigroup’s US institutional equities business in 2000.
Thomas Moore, chief market strategist, HSBC Private Bank (TM, HSBC): The overall environment is accommodating to equities – the global economy is continuing to grow at a modest pace. Earnings will be the driver this year – we’re not looking for P/E expansion. Also European markets seem to be good value and offer opportunities.
Michael Strobaek, global chief investment officer, Credit Suisse (MS, CS): Our view is that growth will be driven by the US as its economy continues to recover. It is less broad-based than some would wish – with capital spending not yet kicking in. Europe is following with lower growth rates but some encouraging signs. In emerging markets those with a strong balance sheet, such as China and north Asia, are profiting, but emerging markets as a whole are no longer driven by China’s commodity boom. And the rising long-term US interest rates have had an impact. So emerging markets need to be looked at in a more differentiated way now. We also don’t expect to see such high equity returns as in 2013. The recovery has been discounted in, and it’s more realistic to expect 6% to 10%. We don’t believe the cyclical bull market in equities is over, but we will see more volatility and market swings than in 2013.
Richard Madigan, CIO, JPMorgan Private Bank (RM, JP): There is an important change in leadership happening as developed markets drive the positive momentum behind global growth. The US is pushing to grow between 2.5% and 3%. Europe is moving out of recession – although we expect no more than 1% to 1.5% growth in 2014. Japan we expect can grow by around 1% to 1.5%. Emerging economies will continue to anchor global growth at between 5% and 5.5%, but it remains a decelerating trend.
Alex Friedman, Global CIO, UBS Wealth Management (AF, UBS): The US is the furthest along in terms of deleveraging and household debt is now at around 2002 levels. We expect 3% GDP growth for the US; Europe should grow by around 1% as the fiscal austerity drag is waning. And with demand picking up for exports we expect 5% GDP growth in emerging markets. We don’t think equity markets will continue to return double digits – a more reasonable target in the US would be 7% to 8%. Europe looks cheaper than the US but it is fragile and comes with more risk.
Steven Wieting, global chief investment strategist, Citi Private Bank (SW, Citi): Emerging and developing regions of the world should maintain the fastest growth rates. However, in many cases, those rates are decelerating. We expect China to grow 7.3%, down from 7.6% in 2013. We don’t assume that the fastest GDP growth rates necessarily offer the highest returns on investment, and we expect more measured growth in China to be more profitable for many firms than in the past.
The US and the UK should easily be the fastest-growing large developed economies. The 1.3 percentage point acceleration in the eurozone’s growth rate we expect in 2014 could still be a very meaningful positive surprise to investors.
MS, CS: We don’t believe it is realistic to expect high returns from government bonds; interest rate-sensitive fixed-income instruments can even mean losses to investors. For returns, we suggest good-quality US and European high-yield bonds or emerging market hard-currency bonds returning some 3% to 5%.
RM, JP: We’ve told clients to keep it simple and stay with shorter-maturity bonds. We are underweight fixed income and laddering short-maturity bonds – with target duration of 2 to 2.5 years. We continue to own extended credit, including high yield and loans, but far less than we have in previous years.
AF, UBS: We expect poor total returns for government bonds, and so credit should play a more important role. There will be higher returns on investment grade through to five years although some drag because of rising interest rates – so returns will be more like 1% to 2%. We also like high yield.
SW, Citi: Standard fixed-income markets should remain challenging in 2014 and we remain underweight. We still favour high-yield debt overall, but particularly in Europe. US municipals with duration risk hedges seem reasonably priced for a higher interest rate environment and tax-advantaged investors, but only for those willing to hold until maturity. For hold-to-maturity investors, off-the-run bonds generally and some structured vehicles offer a good tradeoff for higher yield in return for reduced liquidity.
TS, HSBC: Hedge funds can reduce volatility in a client’s portfolio and we are expecting increased volatility this quarter – we’re coming off a strong year in equities and will be seeing some sector rotation. Equity long/short strategies have been performing well and we expect that to continue in the first quarter. We’re also keeping an eye on commodities as they had a rough 2013. It’s too early to make a call on gold rebounding, and real estate offers some selective opportunities.
MS, CS:Absolute-return products are becoming more palatable now that it’s clear that other investments that were deemed safe are no longer so and returns cannot be expected from such places as government bonds. We would look for sufficiently transparent and diversified multi-asset portfolios and hedge funds.
RM, JP: Last year we did a rotation out of traditional fixed-income benchmark-aware strategies into strategies that take underlying market risk with greater tracking error – but they are effectively still long asset class beta. We are also overweight hedge funds – where appropriate – funding the overweight from fixed income. In hedge funds we continue to favour event-driven, distressed and long/short strategies – targeting an underlying beta similar to extended credit.
AF, UBS: Hedge funds haven’t done well over the past five years as it has been a politically driven market. Long/short and event-driven strategies fare better but we’re not expecting blow-out returns. In any long-term portfolio we encourage a 12% to 15% allocation to hedge funds because it makes sense to allocate to uncorrelated assets in a low-return environment.
SW, Citi: Absolute-return strategies helped fixed-income investors cope with a rising rate environment in 2013 and we expect this to be so in 2014 as well. With the US stock market no longer depressed, we see increasing opportunity in long/short equities and fixed-income structures that can take advantage of rising rates.
TS, HSBC: We are overweight in Europe and maintain an equal weighting in the US right now. We are constructive on US equities, but expect Europe to outperform. In emerging markets we remain selective, and are more positive on Asia’s emerging markets within the region.
MS, CS: Europe looks more obvious than the US. In western Europe we like Germany as it is the most cyclical and valuations look good; also in Italy cyclical stocks provide an opportunity. In emerging markets we’re looking for structural reform and healthy external balance sheets such as China. Also Taiwan and Korea. We’re staying away from weak economies that need to get their houses in order, such as India and Brazil.
RM, JP: With developed markets now more broadly in recovery, we began to shift our overweight in emerging markets back into European and Japanese equity markets last year – a trend we expect to continue in early 2014.
Not all emerging markets are the same, however. In Asia we favour countries that are commodity importers with stable current accounts and positive earnings growth.We also prefer active managers in emerging markets where stock selection makes a tremendous difference for performance.
AF, UBS: We are overweight the US and neutral on emerging markets – in equities and high yield. Emerging markets will benefit, but the larger countries, such as the BRICs, still have a big challenge in terms of structural changes as they converge more to developed markets. We are still overweight China and Korea and Mexico (the latter for its corporate earnings and energy reform). We are also overweight the eurozone.
SW, Citi: We expect Europe’s financial markets to follow the US recovery. The extra growth in emerging markets of the past decade will be downshifted or sourced from elsewhere. The development of the EM consumer is a long continuous process, but for a tactical one-year to two-year window, we see north Asia’s markets as the relative winners, with low market valuations and a decent exposure to the strengthening recoveries in developed markets.
MS, CS: We think at least another two to three years given the slowness of this cycle. We are in the phase when recovery is gathering pace, but returns will slow down, and then in the final phase we will see a final leg-up, but we are not there yet. An optimist would say we have another five or six years, but that is the best case in my view.
RM, JP: We told clients at the start of last year that 2013 was a year of rational exuberance and not to be out of markets. We feel the same about investing in markets this year. But we are keeping a close eye on valuation as, unlike last year, there is nothing obviously cheap across markets. Markets aren’t over-extended with regard to valuation, but they now have to justify the fact that the majority of returns last year were driven by multiple expansion. We need to see both top-line and earnings growth this year across equity markets. This year is likely to define how much further markets can run ahead. With global growth more balanced and investor exuberance still tempered, this part of the recovery cycle can run well into 2015 – with lower returns. However, if markets actually become over-extended, we may be pulling back on certain investment opportunities later this year, in favour of markets worth revisiting.
AF, UBS: We have a tactical time horizon of six months and see this window as remaining open if risks do not increase. We would stay overweight US high yield and equities, underweight UK and Swiss equities as they are more defensive and in the UK sterling is a drag and corporate earnings are outside the UK. In Europe there are some risk factors: the Italian election for example. On the whole geopolitical risks are low, but we might be surprised by territorial disputes between Japan and China and Middle Eastern disputes. China is always a risk because the rapid credit growth might be a bubble.
SW, Citi: We expect US unemployment to fall below the present 7%, with above-trend growth sustained for two to four years. But since 2007, the labour force aged 25 to 54 has fallen by just under 4 million and roughly half of those are males aged 25 to 44. If the economic recovery incentivizes a rebound in the labour force, the US and global recovery could be an unusually long one. But we can’t just assume it. Such notions require continuous monitoring.