Pictet senses opportunity knocks in a resurgent US

It might sadden Yves Bonzon to think this, as a 23 year-veteran of one of the continent’s oldest private banks, made famous by an entrepreneurial wealthy family. But as far as he is concerned, Europe is finished as an economic dynamo, at least for the time being.

The future, believes the chief investment officer at Pictet Wealth Management, responsible for SFr150bn (€125bn) of private client and family office assets, will not only depend on Asia, as many of his Swiss compatriots believe. Rather it will be determined by the world’s last remaining, if fading, superpower, the US.

By Mr Bonzon’s calculations, the US-driven global recovery is just round the corner, fuelled by savvy economic stewardship through one of the roughest patches in our history. Currently, he believes, there is a deficit of 600,000 US housing units in terms of annualised housing starts relative to demographic needs, with the potential construction of each one likely to be responsible for between four to five new jobs.

“When the housing market gets back to normal, you will have two or three million jobs created mechanically in the system,” reckons Mr Bonzon. “They are going to come back, although it may take a matter of time, but we are closer to the end of the housing overghang than the beginning.”

The liberal US attitude to debt will also be a boon to the country’s expected resurgence. “In Switzerland, if you default on a mortgage, you have a SFr250,000 millstone round your neck for the rest of your life,” he says. “In the US, there is debt forgiveness; you can default, but start all over again. This is a big-time plus factor.”

Currently, there is a structural limit of 2 per cent to any US growth, he believes. But this will quickly rise to 3.5 per cent and beyond once pent-up demand kicks in and young people start to leave their parents once more to form their own households.

“We might have a few quarters when the US economy is not growing at 2-3 per cent, but 4-5 per cent. Three quarters of the US economy is linked to household formation and constituents such as cable TV, furniture and heating, but they have been completely flat and stagnating for the sixth year running.”

SAVING AMMUNITION

US authorities are not currently excessively concerned with market levels, believes Mr Bonzon, and will only impose a third bout of quantitative easing should the S&P fall below the 900 barrier. “You don’t shoot your bullets with the market at 1300, [Federal Reserve chairman Ben] Bernanke is fine with that. But if asset prices lose stability, he will fire that bullet without hesitation. After all, Bernanke has a deep understanding of the dynamics of a balance sheet recession and the importance of asset prices within that.”

This recovery, believes Mr Bonzon, will realistically gather pace in the second half of 2013. “Some investors – whom I have a high respect for – are beginning to wonder if it is already starting. I would not bet my horse and boots on this, but [US recovery] may come faster than expected.”

On the other hand, the type of economic austerity packages comprising much of Europe’s economic policy, are doomed to failure, he claims. Vast public sector cuts to repair national balance sheets lead to encouragement of savings and collapsing demand and spending, says Mr Bonzon, a policy he believes will lead to certain recession in Portugal and Greece. “When I hear about the Portuguese scrapping their new airport in Lisbon, I think they are making a big mistake.”

A NEW PHILOSOPHY

This economic background has led Mr Bonzon to restructure the way Pictet conducts asset allocation across private client accounts. The new philosophy will be driven by strategic and risk factors, rather than the traditional cash, stock and bonds approach .

The bedrock of the new portfolio, with echoes of yesteryear, will be a major allocation to corporate credit. This will work well during a debt crisis “when asset valuations are under pressure and you need to be higher up in the capital structure”.

Above this solid foundation, the bank is advocating layers of defensive and growth equities. Within the defensive sector, Pictet is recommending just the type of domestic stocks such as Roche and Nestlé, which Swiss rivals Julius Baer and Sarasin have recently favoured.

To these low-beta stocks, which should account for 20 per cent of portfolios, can be added the likes of Procter & Gamble and ExxonMobil.

Yet surprisingly, Mr Bonzon has downgraded equity growth exposure to absolute zero. “Liquidating our positions in Asia was one of the things we did right last year,” he suggests. “In contrast to some of our competitors, we have almost no exposure to emerging market equity or debt.”

Although the epicentre of the economic crisis is currently in Europe, emerging market shares and bonds were the worst performers in 2011, says Mr Bonzon. “It is a naïve view of the world to think they will go up when Europe goes down.”

Not only are emerging markets a high-risk asset class, but they are incredibly sensitive to changes in GDP growth and cyclical expectations, he believes, as well as displaying poorer levels of corporate governance than Western developed nations.

Pictet does however believe in the diversifying aspects of both hedge funds and gold, with a recommended 7 per cent of portfolios allocated to the precious metal, which Mr Bonzon expects to eventually hit a $3,000 (€2,270) upper limit.

Dynamic asset allocation also forms the basis of one of Pictet Funds’ top selling products, an “all weather” fund, the Momentum Strategy Mandate, which achieved 18 per cent growth last year through adopting a momentum strategy. However, this is a high risk, high-octane fund, which can be 100 per cent long equities, although the majority is in defensive stocks.

This year will see the launch of a new mandate for wealthy clients, with allocations determined by a quantitative indicator and a concentrated selection of stocks chosen across a variety of sectors.

Asset management at Pictet took off during the 1990s, when the bank decided to diversify a business threatened by the imminent closure of the secrecy curtain and to leverage its premier wealth management brand.

As it happens, the success of the funds arm has further boosted the private banking franchise, says Mr Bonzon, with the two main units of the business now feeding off each other.

He gesticulates furiously at any suggestion that the two sides of Pictet are becoming increasingly integrated. That would be commercial suicide to a bank that prides itself in having a superior service model to the ‘one-bank’ organisations of Credit Suisse and Julius Baer. But he clearly enjoys the increased co-operation between the two.

“You can never over-emphasise the benefits of a successful asset management practice,” enthuses Mr Bonzon.

Fund flows

Pictet’s private banking and asset management franchises have co-operated successfully on product ideas since 2004 to build up a SFr10.9bn (€9bn) local currency debt fund.

An even greater success was the range of multi-currency money market funds launched at the onset of the crisis in 2008, raising SFr16.2bn in that year, with customers of rival Swiss banks switching some of their custom to Pictet.

The bank was also helped by the poor standard of some of the services being offered in the private banking sphere, with some of the largest banks appearing “really terrible at doing their job,” says Mr Bonzon, not mincing his words. “Families we know were shocked.”

Recently, he has also seen funds flowing in from Greek and Italian clients, nervous about the economic situation in their own countries. “These are clients who want to have an account outside their own country, not for tax reasons, but for capital and risk reasons. They need to know that the financial side of assets will be safe if confiscation happens.”

The end of banking secrecy has also proved beneficial for Pictet, though in a somewhat unexpected way. “We knew it was going to happen for 10 years, but when the banking secrecy paradigm finally shifted, it gave us access to clients we could never have hoped to access before,” confides Mr Bonzon.

Whereas the bank always had French clients banking in Geneva, some potential customers were deterred by the image of secrecy. “Now that that barrier to acquisition has gone, cross-border business makes sense in more people’s minds.”

Yves Bonzon, Pictet