wealth management and chief investment officer for EMEA at Merrill
Lynch, warns that the stark change in investor fortunes is likely
to have long-standing repercussions for private client investment
management. Dan Jones reports.
Investors who grew accustomed to years of healthy asset growth will
inevitably have been shaken by the collapse in world markets seen
in October, and the challenge for private banks is to both reassure
clients and successfully recalibrate their portfolios.
Go deeper with GlobalData
Dugan, speaking at Merrill’s expansive City offices, told PBI that
the current market turmoil represented the beginning of “a
completely new phase with regards to the respective sizes of
government and the financial services sector.”
Speaking before the UK government announced plans to recapitalise
its financial institutions, Dugan spoke of the “panic among
policymakers” and admitted that “one question we can’t answer is
how policymakers and regulators will react in the long term. But
there is likely to be a huge move towards re-regulating
industries”.
“For the sterling-based investor, there has been a very material
change in conditions,” Dugan added. “Longer term investors may also
focus more on liquid investments.”
A glance at the performance of the leading US and UK indices during
the opening weeks of October show they appear to be bearing out
Dugan’s prediction.
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By GlobalDataFor investors, the liquidity crisis is affecting almost every asset
category, to the extent that even private banks’ most defensive
multi-asset investment strategies are down by around eight percent
on the year.
With markets experiencing their largest drops since the 1987 crash,
sentiment has quickly shifted to minimising losses and capital
protection strategies, as well as fast access to cash.
As with institutions themselves, “clients have a big appetite for
liquidity. That is working to the detriment of hedge funds, and
people are similarly cautious about having money tied up in private
equity investments. There is no scale for liquidity in alternative
investments,” Dugan notes.
The global outlook is also likely to shift as a result of the
downturn, says Dugan, who raises the possibility of a crisis of
confidence in the very philosophy of globalisation. Though he
remains “more worried about the local situation”, that does not
preclude changes further afield.
The contagion in global markets has spread to Asian economies.
Singapore announced on 10 October that the city-state was in
recession for the first time since 2002; Indonesia and Thailand
both temporarily suspended trading in its entirety; and concerns
persist over the strength of the Korean won. But Dugan believes
that the relative stability of the underlying economies stands the
region in good stead moving forward.
“It is part of the normal cycle of emerging markets,” Dugan says.
“The good news is that these economies have not collapsed as they
have in the past”.
Of greater concern to the Merrill CIO is the status of the real
estate markets in both the Middle East and Eastern Europe, both
particular investor favourites in recent years.
Shares in the five largest UAE real estate firms have fallen by an
average of 50 percent since the turn of the year, with concerns
weighing on the availability of project finance. Dugan cites
reports indicating that over 10 percent of building projects in the
Middle East are now on hold. “We could be looking at a Dubai
property crash”, he says.
Dugan sees a similar risk in Eastern Europe, which he believes is
the “Achilles heel” of the continent, declaring that “there are
hidden problems [in CEE] across the board.”
For Merrill’s own clients, the emphasis is on “optimising
portfolios to liquidity, then to risk. I still believe there are
some interesting opportunities in the ‘Old World,’ given the extent
to which fear is now being priced in,” Dugan adds.
Lessons to be learned from the crisis are apparent on an investment
level: “there needs to be more protection on the way down, as well
as clearer mechanisms for expressing risk and clients understanding
risk. That could take the form of anything from written disclaimers
to something more material”, Dugan states.
Longer-term client sentiment remains harder to gauge, however. A
willingness to accept discretionary management of assets may be
tempered by the poor performance of some portfolios, yet conversely
the turmoil may still further heighten the reputation of those
wealth managers who are able to provide alpha effectively.
It remains to be seen whether the recapitalisation plans announced
by the UK, US and EU governments will mark the bottom, heralding
the return of those who, in Dugan’s words, have been “spooked out
of equities” by the collapse of Lehman Brothers and the
hitherto-unthinkable problems seen at other global institutions
such as insurer AIG.
He warns: “We are in the middle of the greatest ever period of
counterparty risk, and governments are still borrowing. I am
cautious to make predictions but can envisage an upturn in the
global economy in the second to third quarter of 2009”.
The rise of intergenerational wealth transfers saw many
beneficiaries invest in the market as soon as they were able,
contributing to the dawn of a generation of HNWIs who are
“typically very fully invested”. That confidence is likely to take
time to recover.
“Markets have collapsed before, and equities are now priced for a
default risk. But we may not for a long time trade at 20 times
earnings, and the fear this time is that it may not be a v-shaped
recovery,” Dugan advises.
