Burkhard Varnholt, CIO & head of investment solutions, Julius Baer
Richard Madigan, chief investment officer at JPMorgan Private Bank
Steven Wieting, global chief investment strategist for
As the private banking industry morphs into one leading with advice on the structuring and investing of wealth, the chief investment officer has nowhere to hide.
“You have to be at the top of your game all the time,” says Juerg Zeltner, CEO of UBS Wealth Management, whose firm wins the award for best in research and asset allocation globally.
“The more you become an investment house, the more your clients want to know what you are doing, and that means you need to build a track record. What were your calls? Were they right? Decisions are much more visible these days. You cannot rest.”
Indeed, last year Euromoney polled five CIOs of the largest wealth managers for their views; the forecasts were mixed. The consensus was that 2014 would be a year to stay underweight fixed income and look for absolute returns.
Regionally, however, their views varied. All of the CIOs were overweight in Europe, while it was UBS that made the call on being overweight the US.
It was a surprise, says Florent Brones, CIO at BNP Paribas Wealth Management. “With the S&P500 up by around 24% in euro terms at the end of the year compared with EuroStoxx’s performance of around 2%, it is fair to say that the more than 20% outperformance was higher than expected.”
Surprises were indeed plentiful last year. Michael Strobaek, global CIO at Credit Suisse Private Bank points to the timing of the Bank of Japan’s quantitative easing move. For Mark Haefele, CIO at UBS Wealth Management, it was the government bond market.
“Despite already low yields, an end to quantitative easing and a stronger US economy, US Treasury yields fell further over the course of 2014,” he says. “German Bund yields saw even larger moves lower.”
Oil price crash
Then, of course, there was the oil price crash. “Why exactly the oil price drop was so abrupt and not gradual poses interesting questions,” says Steven Wieting, global chief investment strategist at Citi Private Bank.
“The price decline just realized will drive major performance differences among oil consumers and producers in the coming year.”
The surprises will continue. “While volatility is not at all-time highs, there is absolutely no time to stop,” says Zeltner. “Things change more or less overnight. Greece leaving the euro was not on the radar four months ago. Oil at $60 a barrel six months ago would have been a nuts assumption.”
The shift to investment management has put greater demands on the industry, he says. “Back in the old days you could claim to be managing assets and have a sweet spot that you were particularly good at, like fixed income or equities.
"Today, though, it is asset allocation that you need to excel at, and then having a multi-manager platform that sources the best and delivers in a tailor-made way. You need an investment DNA and investment processes that can cope with the complexity of today’s markets. That is unbelievably demanding.”
Even more so for banks with global clients because for every region there is a different set of problems to solve, be those cultural or market driven.
Euromoney asked its private banking survey respondents where client appetite would be this year in terms of asset classes, and the answers varied by region.
In Asia, western Europe and north America, equities are expected to be the most popular investment, while in Latin America it is fixed income. Appetite for fixed income and structured products in Asia is also thought to be strong, while private equity and hedge funds are expected to be in demand this year in north America.
The growing appeal of social impact and socially responsible investments is also evident in western Europe and north America.
So what do the experts predict? This year, the CIOs of Euromoney’s top 10 ranked global private banks put their views on the line to share where they expect growth and where the risks could be hiding.
MH, UBS The most promising region is the US. We expect US GDP growth to accelerate to 2.9% this year as consumer and business spending increases and fiscal policy stops dragging on growth.
SW, Citi We expect the US and UK to lead developed country growth in 2015. We expect Asia to be the region that benefits most from 2014’s oil price drop.
AW, Deutsche The US will be the strongest growing developed economy in 2015, and by some margin. US GDP growth of 3.2% in 2015 will be far ahead of around 1% growth in both the eurozone and Japan.
RM, JPMorgan The US will lead developed-market growth in 2015, but the real question is whether it can continue to grow at 2.5% to 3% if global growth stalls out. We put a 30% probability on Europe slipping into recession in 2015. A weaker euro will help Europe, but quantitative easing seems more a panacea to animal spirits than an asset-reflation tool, given how low European bond yields already are. Emerging markets are the wild card, especially commodity exporters. Latin America, emerging Europe and Africa stand out as concerns.
BV, Julius Baer Asia will still provide most of the heavy lifting. China remains the world’s biggest economy – in purchasing-power terms – and will continue to advance fast. India should do well, too, and so should much of southeast Asia. In Latin America, Mexico stands out for growth dynamics and scale of the economy, while further north, we expect both the US, as well as Canada, to do well, economically speaking. In Europe, there will be slim pickings but arguably not as awful as many fear. Africa remains the silent winner of globalization. Most of the continent will continue to display the world’s highest growth rates, albeit from much lower levels, which is why Africa growth still doesn’t matter as much to the world as the impressive dynamics would suggest. For Russia and the Middle East, they risk being mired in a dangerous spiral of conflict and escalation.
FB, BNP Paribas In 2015, a key theme will continue to be the dichotomy of monetary policies between the US and Europe. Will we see a reversal of underperformance of European markets? This is still the big question. Overall, we would at least expect the end of the underperformance of European asset prices.SM, Goldman Sachs We expect the US transition from mid-2% growth to an above-trend growth pace of more than 3% will be the most important growth development in 2015. While some emerging markets, such as China and India, are likely to post faster growth rates, the US remains the single most important driver of the global economy. In contrast, other major developed countries will work hard to stay out of recession by simply maintaining sub-1% growth rates. Outside of the developed markets, we expect growth in emerging markets to slow.
What is your view on fixed income for 2015?
TM, HSBC Our view is the 10-year US Treasury will end the year around 2.5% and the US yield curve will flatten, with rising short-term rates as the Federal Reserve starts to increase Fed funds in the third quarter. We expect 10-year rates in Japan to remain relatively flat.
YB, Pictet Bullish long-term Treasuries, no change from last year. We will re-test the low at 1.38% on 10-year US Treasuries. Bearish high-yield both sides of the Atlantic. Still cautious emerging-market debt.
RM, JPMorgan Rates will move higher, but much slower than expected and with a real possibility that if the European economy gets worse, government bond yields will go lower before re-pricing off the Fed’s policy rate lift-off mid-year. That leaves us underweight fixed income and exercising caution.
BV, Julius Baer The most important view is that US dollar long yields will remain lower for longer. They may well remain depressed until 2020 as structural excess demand from pension funds and insurance funds, as well as continued financial repression in the west, weigh heavily on them. And frankly, there is pretty much the same argument for maintaining an identical view on European, as well as Japanese yields. As long as most other big currencies are directly or indirectly pegged to these, this is essentially a global view.
AW, Deutsche We would look for relative value – over benchmark yields – in some eurozone peripherals and corporate bonds. Also, covered bonds are attractive.
MS, Credit Suisse We do expect bond yields to move higher in 2015, but this will most likely be compensated by coupon payments, which is why we have neutral total return expectations.SM, Goldman Sachs We recommend that investors underweight investment-grade fixed income because we expect US interest rates to gradually rise this year. We expect the policy rate to be in the 0.75% to 1.00% range by year-end. As the policy rate starts to rise and pushes up long-term yields, long-duration instruments could quickly give up their entire yield in capital losses. That said, other areas of the fixed-income market, such as high yield, continue to offer attractive spreads relative to our view of expected defaults.
Which asset classes do you expect to outperform?
TM, HSBC We are expecting increased market volatility in the first half of the year. For portfolios using fixed income as a means to reduce volatility, we would suggest increasing exposure to hedge funds. We are looking for European equities, ex-UK, to perform well relative to other asset classes.
YB, Pictet US Treasuries, developed equities. In that order.
MH, UBS We expect equities and credit to outperform government bonds, and for US assets to outperform non-US assets. We hold an underweight position in emerging markets.
SW, Citi We continue to expect equities to outperform. This is, of course, a consensus call. Where we may differ is that we believe we are in the second half of the global economic expansion with the multi-year rally in risk assets in its later stages.
RM, JPMorgan Equity markets should outperform this year, but with lower returns and higher volatility. We are currently overweight the US and Asia. Inflation expectations matter this year, and we will need a little more inflation for multiples to be able to move higher. We aren’t near an equity-market bubble as equity markets continue to feel about fairly valued.
BV, Julius Baer Plain and simple: equities.
MS, Credit Suisse We think equities are likely to have the best performance among the major asset classes. Within equities we prefer Japanese, European and Australian stocks due to solid earnings growth and implicit support from central banks. We believe that the US dollar is likely to appreciate further.
AW, Deutsche I hold faith with equities, despite recent market volatility.
FB, BNP Paribas We are overweight mature equity markets, US and Japan. We are neutral for the short term on European equity markets – we will come back to a more positive stance when the ECB activates more monetary accommodation. Neutral on equity emerging markets; we have a positive view on Asia ex Japan.SM, Goldman Sachs Pockets of the equity market offer potential for the strongest returns in 2015. In the US, shares of banks are likely to outperform thanks to accelerating loan growth, rising rates, an attractive multiple and increased capital distributions to shareholders. Outside of the US, we see strong return potential in Japanese and Spanish equities, both on a currency-hedged basis.
What are the biggest risks for 2015?
TM, HSBC Central banks are operating in uncharted territory, which increases policy risk. Any potential policy missteps from central banks’ decision-making could cause unintended consequences. Another unknown is the full impact of lower oil prices. While lower oil prices are a benefit for some countries, such as India and Japan, they are a negative for oil-producing countries. Even in the US, some states will have a negative reaction. Texas will feel the negative effects with a decrease in employment and many capital expenditures put on hold. However, US and European consumers will benefit from lower energy prices.
YB, Pictet Politics in Europe. A major policy mistake by a government or a central bank. Switzerland just made one.
SW, Citi The oil price collapse will boost profits of many consumers, but it is unlikely to stave off a wave of bankruptcies among oil consumers that were going to occur in any event. By comparison, the near halving in crude oil can generate bankruptcies and sovereign defaults among marginal producers. As always, one can worry about how well markets can rationally dissect distress from the broader backdrop. High levels of central bank liquidity, even if the Fed begins a mild tightening cycle, argue that contagion is modest risk, not a central case. At the same time, the oil price collapse may add to political instability around the world, which remains an ongoing concern.
RM, JPMorgan The biggest macro risk this year we see coming is from rising disinflationary pressure, especially in Europe where the Japanification of Europe will become a market discussion point again. There comes a tipping point at which disinflation becomes something worse and central banks no longer have the ability to revive animal spirits, which is why the Bank of Japan is all in on asset reflation and the European Central Bank is running out of time for simple QE to fundamentally matter. And in the background, there is still the question of when an exit mechanism is shaped – forced or elected – for Europe’s monetary union and the euro; something that still needs to be defined.BV, Julius Baer In no particular order: geopolitics; epidemics and related scares; monetary and economic policy experiments; competitive currency devaluation; hysteria and herding in financial markets; combined with the media exacerbating such cycles.
MS, Credit Suisse Negotiations for a potential debt restructuring in Greece; low oil prices could lead to escalation of political tensions, eg to increasing instability in the middle east if the us signals that its geopolitical interests in the region are diminished due to the shale oil and gas production; potential credit events in emerging markets could have a contagion effect across asset classes; economic growth surprises to the downside, volatility spikes further.
FB, BNP Paribas Deflation in Europe is clearly a threat. The market reaction to the beginning of the Fed tightening could surprise, if inflation or growth accelerates more than expected. China could slow more than expected because the decline in property prices could be more pronounced than expected, with negative consequences on the financial sector.SM, Goldman Sachs The beginning of policy rate normalization is the most significant risk to the US economy. While we do not expect a disorderly transition to policy normalization that would impact the real economy, it cannot be ruled out. Additionally, monetary policy errors in Europe or Japan could have negative consequences, as could political discord in Europe. Ongoing flare-ups in several geopolitical hot spots also remain a risk this year– ranging from North Korea, to the progression of ISIL, to the war in Syria, to the potential for an oil shock from Venezuela, Nigeria or Libya. Finally, while an Ebola epidemic spreading beyond Liberia, Sierra Leone and Guinea is a low-probability risk, west Africa is far from free of Ebola.