What is your investment outlook for the rest of this year and for 2011?
We are generally optimistic on risk assets and cautiously optimistic on equities. Equities markets, even in Asia, are still very correlated with those in the West and cyclically they have not decoupled. Currently emerging markets equities are slightly underperforming developed markets but if markets stay optimistic this could change and emerging markets equities could outperform. The impact of the withdrawal of stimulus packages will also need to be closely monitored.
How has your focus on Asia changed?
We have increased our presence in Asia, both in terms of the assets under management we target raising from the region and also in terms of increasing our asset allocation to the region.
Globally, our group within the bank manages around $10 billion of assets and our over-arching message in the recent past has been 'preserve capital in the West and grow in the East'. We are significantly increasing our exposure to bonds, equities and currencies in emerging markets because we see these markets offering more attractive risk-adjusted returns, which the West does not currently offer.
What is your outlook on currencies?
We think the dollar will be firm this year as the euro is seeing a lot of pressure, making the dollar a relatively safe haven. We estimate that US debt-to-gross domestic product will reach north of 100% by 2014, raising questions related to US government bonds as well as the value of paper money in the US. Thus we forecast a weakening of the dollar during the next three to five years. In Asia, we like the renminbi, even though free float is currently a while away, and expect it to appreciate by 5% to 10% during the next 12 months. The Indonesian rupiah, Malaysian ringgit and Philippine peso also look interesting. We are also forecasting appreciation of the Indian rupee, but currently the only way to play this market is through non-deliverable forwards.
Should clients still buy alternative investments?
2009 was a year when some alternatives delivered well. We are currently advocating a strategy of moving into liquid alternatives, specifically Ucits III hedge funds. We advise detailed due diligence on investments into single hedge fund managers. We are not as positive on private equity in the West given that the debt finance required for leverage to achieve target returns of most private equity funds is still not back. We are bullish on real estate in selective regions.
What are your views on real estate in China?
We are generally positive on real estate in Asia and are examining ways of developing real estate exposure in Asia for our clients. China still has purchasing power and savings and I don't think there is an immediate bubble about to burst. Chinese consumers are not highly leveraged, unlike their Western counterparts. Some correction in the real estate market could have a knock-on effect on Chinese banks but I don't see this bringing the economy down.
What instruments are you currently recommending?
We have concerns regarding sovereign debt in developed markets and favour emerging market bonds due to their risk-return profile. Last year was a blockbuster year for returns on both investment grade and high-yield debt from industrialised nations and this will not be repeated in 2010. We prefer emerging market debt to high-yield debt from developed markets.
We remain buyers of gold in the long term. The argument in favour of buying bullion is supported by buying interest from Asian central banks; the low opportunity cost of holding gold; gold's attractiveness as a store of value at a time when many governments want their currencies to remain weak; and the inflation hedge gold provides.
Do clients want to be more involved in portfolio decisions since the crisis?
Clients have definitely become more demanding and are seeking simplicity, liquidity and transparency, in our experience. Our response has been to hire more talent and significantly beef up our staffing on the investment management side. This also enables us to provide more granular coverage of asset classes.
Has your firm benefited from the dislocation at the larger private banks?
To some extent yes, but in Asia the largest benefit we are reaping is from having enhanced our presence and offering. While the larger banks benefit from scale, boutique banks such as ours have the ability to be more nimble and offer investment advisory and investment management services that are significantly better.
How have the changes in regulation of the private banking industry, especially in Switzerland, impacted Clariden Leu?
The regulatory landscape has changed significantly and Swiss private banks have to deal with this. But I am confident that when the dust settles, the industry in Switzerland will emerge stronger because of the upheaval. Our service model is holistic advice with a strong client focus, unlike some other jurisdictions where advice is product-driven. This model will endure and flourish.
This article was first published in the May 2010 issue of FinanceAsia magazine.