How do you see the equity investment horizon right now? Are we at the bottom of a trough, or are we looking at a false dawn?
du Saint: We've lived through three difficult years for investment and are recommending capital preservation to our clients. Our clients have been invested in bonds for a long time, as we've recommended bonds for the past two years.
However, now we're starting to recommend a switch from a bond-oriented portfolio to a progressively more equity-oriented portfolio. We are at a time when equities will probably be a good investment. As everyone knows the extent of the latter will depend on the US economy.
In these uncertain times we also recommend equity products that have capital guarantees as well as some exposure to hedge funds.
Internally do your client advisors have the sense that we are entering a new bull market?
Considering what we have seen during the last three years, we will be very prudent about recommending a sharp increase in equity exposure. We have seen what looked like several starts of bull markets turn bearish and we will thus be prudent. In a month, I might talk a bit differently. But as of today we remain a little cautious about the quality of the bull market.
What is the mood of the client base?
They are still conservative. They've seen three years of bear markets and this had never happened in the history of modern private banking. Any client that has been in the equity markets have more or less burned their fingers. So clients have to be very confident about the equity markets before they return. Our clients will need some time, even if we advise them to invest in equities progressively.
What is your view and that of the clients on Asian equities versus global equities?
We believe that Asia provides promising opportunities to investors. Fundamentals are sound and valuations attractive. Our clients are also positive on Asian equity markets. Putting SARS aside, Asia has been a place with good growth and the equity markets have done better than elsewhere. And being Asian clients, our clients are more knowledgeable about Asian equities.
Bonds have had a bull market in recent years. Now interest rates are so low, are you taking the view that the bond bull market is over?
We think that even if there is still a possibility of increasing the value of your bond portfolio, the probability is low. The chance of an increase in interest rates is higher than a decrease over the medium term. As we believe the value of the bond portfolio is close to the maximum, we're telling clients to start to take their profits.
Regarding the equity market, we will only increase slowly our exposure on equities on weakness. Deflation is a subject that comes up a lot these days.
What's your house view on deflation? Is it going be a serious problem and therefore bad for people with capital like high net worth individuals?
Our house view is that deflation is a fear and this is why we don't recommend being too aggressive on equities. But we don't feel it is a big fear. We don't think the US economy will go into deflation. And if the US economy is growing it will help Europe not to go into deflation too. So the question marks are around the US recovery. But our house view is that we are not going into deflation.
Obviously the euro has had a stunning run versus the dollar. What's the house view on this rally? Is it over?
The house view has been for a stronger euro for quite some time. Eight months ago we were forecasting the euro going to 1.15 to the dollar. Our most recent view is that the euro will decline a bit versus of the dollar to 1.10 and then start to strengthen again to around 1.15 and towards 1.20 at year end.this could be the new trading range.
BNP Paribas Private Bank is very strong in the area of structured products. What advantages do these have for the clients?
The purpose of structured products can be very different. They can allow capital guarantees. Some clients like the fact you can gain exposure and take part of the profit, without risking your capital.
Then there are range notes, which allow you to bet on a limited increase (within a range) in short term or medium term interest rates. Supposing you bet right this can give you a more significant yield. In our view, even for conservative clients, range notes have offered enhanced yield for a very acceptable level of risk.
So range notes are still extremely popular?
They are still popular but much less so than six month ago.
You are about to launch a new equity guaranteed product. Can you talk about that?
We are on the eve of launching a capital guaranteed discretionary portfolio that will be managed by the bank. The portfolio will be invested in equity- and fixed-income funds. It will be managed through a dynamic asset allocation methodology allowing to maximize the participation to the positive performance of markets through a periodic re-balancing of the investments in equity- and fixed-income funds. If the portfolio generates positive returns, the equity and bond exposure can be increased; if the portfolio generates negative returns, the equity and bond part will decrease to the level that guarantees the investor the initial invested capital (less the hedging premium) at the maturity.
The time period is three and half years and the minimum investment is $500,000.
We feel it is a good time to launch. Discretionary portfolio constructed to follow market benchmarks have had a hard time for the past three years. For clients who focus on total return rather than relative performance to market benchmarks, the Capital Guaranteed Portfolio provides the ideal solution: the possibility to benefit from the upside potential of equity and bond markets without risks for the invested capital. This Capital Guaranteed Portfolio gives the client an answer to their fear of difficult times.
So the portfolio can be traded in the three and a half year period?
Yes, the clients can liquidate the portfolio before maturity but obviously in that case they will not benefit from the capital guarantee. We are among the first banks to market such type of product, combining discretionary portfolio management with a capital guarantee. We are confident that it will be very popular among our clients