Within a matter of days, we have seen the face of more than 100 years of banking history change beyond recognition. In the wake of the Wall Street meltdown, we are certainly in revolutionary and unprecedented economic and financial times. Many compare our current climate to the environment of the 1970s or even the Great Depression of the 1920s û though there are some key differences, most notably the increased role of credit in todayÆs markets and increased globalisation of trade.
This is a wake-up call for many people and financial institutions. The big question is how to navigate through this period and take advantage of opportunities in the future. Heightened uncertainties and increased risk aversion have caused a widespread re-pricing of risk and increased volatility in both the financial and equity markets. However, we also need to remember that volatile markets create opportunities as well as increased risk levels, and the market always seems to bounce back, eventually. For instance, the market has survived major upheavals in the past û the Asian financial crisis for example.
At the heart of the wild volatility and trading volume we have experienced recently is the underlying credit and monetary crisis; the value of many debts is becoming increasingly difficult to identify. As the US government continues to agree to expand the money supply to bail out overleveraged banks and brokerage houses, the financial markets are likely to remain in a state of flux. While their efforts to support the financial industry is to be commended, whether or not the commitment is successful, only time will tell.
The strict risk strategies that Julius Baer applies have meant the bank has zero exposure to subprime-related products. We are wealth specialists, and are not involved in investment or retail banking. Consequently, our activities are firmly focused on private client asset management and client relationships.
We apply a wealth preservation strategy with a focus on consistent growth, where we do not follow market trends if we do not think popular products match our clientsÆ profiles.
By utilising this strategy, our clients have been able to weather the ups and downs of markets, testifying to the strength of our private bank. As a result of the current financial crisis, more people are realising the importance of wealth management via diversification of assets and are subsequently seeking our professional advice. The strength of Julius BaerÆs well-established global wealth management business is notable for its credit quality and ratings. In Europe, according to an industry report compiled by Merrill Lynch, the company has been rated the number one bank with the lowest leverage risk out of 44 European banks. This means Julius Baer is not facing the de-leveraging process which is under way for European banks.
As Asian markets become more open and developed, we also see greater creation of wealth across the region. The ultra-high-net-worth individuals have increasingly complex demands for managing their wealth, so more are seeking professional help. For example, the composition of wealth today often consists of illiquid assets such as real estate and restricted stocks. We have seen an increase in demand for managing the liabilities side of clientsÆ balance sheets and are offering a diverse range of solutions.
Given the market volatility, it is vitally important that relationship managers stay close to their clients and listen to their ambitions while helping them to manage risk. Investors are asking many questions and are curious what to do with their stock positions. Should they sell or even start buying again? Our view is that it is currently too late to get out of the turmoil, and it is also too early to get back into the market right now.
At the moment, we advise clients to take a cautious wait-and-see approach, while focusing on wealth preservation. Right now we believe that a portfolio structure should include 60% cash, 20% gold, and 20% high quality bonds. Even though investors with liquidity wait on the sidelines and may miss a few opportunities, they are less likely to be exposed to the level of risk they would incur through being heavily invested in the equity markets.
To provide instruments that cushion risk, Julius Baer has created investment tools that participate fully in the performance of the underlying index, stock, or basket of stocks. This type of investment tool is suitable for investors who are expecting a positive price performance but at the same time are unwilling to forego some capital protection. As an alternative to volatile equity markets that are likely to remain with us for the foreseeable future, high quality short-term bonds are generating returns of between 5% and 7%, with relatively low risk exposure. Two years ago, investors were using structured products to generate similar returns. The catchword here is quality; before investing in bonds, investors should carefully examine balance sheets.
This financial environment also tends to suggest the best prospects would be in commodities, and the worldÆs favourite hedge for inflation proofing is gold, then silver and then the other precious metals. So will gold continue to rise in value? In times of monetary uncertainty, gold has historically been viewed as a safe haven û and so, unsurprisingly, we have seen gold make a record jump as well.
However, it is important to remember that gold is also prone to economic activity so there may be some contraction. In addition, the problem with direct investments in gold and silver is that they do not provide interest, therefore this is something that needs to be considered regarding a long-term investment. While the current trend of uncertainty remains in force, products which are related to gold can offer some wealth protection.
Those looking for opportunities to enter the market, non-financial-related sectors such as healthcare and alternative energy offer interesting possibilities. We also see strong possibilities emerging during 2009 for markets in Russia and China where demand for oil and gas and consumer consumption remains high. Whatever the investment attraction, investors should always remember that investments carry risk and it is important to be aware of the level of that risk.
While urging caution we also believe there are worthwhile opportunities to pursue. At Julius Baer we have structured products to track inflation in emerging markets and investment tools that benefit from volatility.
Those considering investing should find out as much as possible about the investment tools that interest them and ultimately make decisions they feel comfortable with. As the industry is likely to face a sustained period of cautious client investment sentiment and market volatility, experienced Julius Baer relationship managers stay close to their clients.
This article was contributed by Andrea Benenati, CEO of North Asia at Julius Baer.
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