Brighter outlook, but not out of the woods yet, says EFG
No doubt everyone wants the financial crisis to be officially over: it has been five long years since it first struck. But full recovery may still be some time away, says Charles-Henry Monchau, head of Investments (Europe) at Geneva-based EFG Asset Management.
“Sentiment is gradually improving, certainly compared to one year ago. There is some interest in equities as investors seek alternatives to cash and fixed income. They are interested in flexible funds, international bonds and potentially high yield opportunities.”
He notes the dramatic changes to Europe’s private banking industry, notably the “white money” policies now being followed by all the banks. “The new regulations are potentially challenging in the short term but present a big opportunity in the long term,” he explains. “Regulation is part of a general trend we have to accept. We have to get organised, and that is what we are doing.”
But recovery is underway. He makes a comparison with Switzerland’s famous watch industry, once threatened by other markets, but which then rallied, working together to move the whole industry up the value chain to become a pre-eminent, global brand.
“We have to do the same with banking, reinvent ourselves and upgrade what we do, evolving the proposition, but always remaining a solution provider, not just pushing products.”
Zurich-based EFG International, listed on the SIX Swiss Exchange, is a global group offering private banking and asset management from 30 locations worldwide, with some 2,300 employees.
Monchau says Swiss private banks are responding to new pressures by extending into asset management. EFG itself has just launched a new capital fund range for institutional and private clients, and encompassing both discretionary and advisory services, following the launch of a dedicated China Equity fund last year.
“The bar is getting higher as the competition gets tougher,” notes Monchau. “Ten years ago, it was OK to be OK. Not any longer. No firm can rely on their brand name along. Consistent performance and responsiveness has to be there.”
Clients of Swiss private banks were particularly hard hit by the Madoff scandal, and Monchau says many are still highly cautious. “Especially in Geneva (as opposed to Zurich, which was less affected), the side pockets and sudden closures all hurt sentiment regarding lower liquidity products,” he notes. “But interest is now coming back.”
Investors are essentially seeking a combination of higher yields and growth. He sees three ways to meet the yield challenge. One is to take a fresh approach to fixed income, and not focus so much on ratings. “We take an absolute return approach now across the credit spectrum, and then hedge duration exposure,” he explains. He notes that nominal yields of high yield debt are low in terms of spread, but there is still potential for further compression.
There are also opportunities to use equities as a yield provider. The Swiss equity market, up around 15% year-to-date, has been among the best in Europe, full of high quality companies paying dividends which is supporting an evident rotation starting from bonds to equities. Structured products can also help achieve yield with protection.
The search for growth leads inevitably towards Asia (ex-Japan), which is why EFG recently launched its China Equity fund. Some secular growth is also apparent in developed markets and sectors, notably in the US. “The last 18 months have seen US companies extend their international operations as the global economy picks up,” Monchau says.
He expects all developed countries to post positive economic growth next year, for the first time since 2007. In Europe, despite the uncertain macro economic outlook, there are certain sectors like luxury consumption that are doing well, partly off the back of demand from emerging market clients.
Swatch Richemond has risen along with buoyant sales, and the pharmaceutical giant Hoche Novartis, with a strong balance sheet, offers both yield and growth. Cyclical stocks have battled over the last two years, but are expected to pick up with improving economies, favouring construction stocks and those like Adecco, linked to growing employment. Even financials, beaten hard since 2008, are now reporting better earnings.
Monchau adds that Institutional investors are once again considering international real estate opportunities, notably in the US. The more sophisticated clients, especially family offices, are also looking at private equity deals and hedge funds. “These trends tend to start in the US, as they are now, and then spread. If history repeats itself we will see that happen in Europe,” says Monchau.