Davis Hall of In­do­suez Wealth Man­age­ment gives Nada El Sawy his take on what to in­vest in when the global econ­omy is slow

The National - News - - BUSINESS | MONEY -

The top­ics dom­i­nat­ing the head­lines – Brexit, US-China trade war and the pos­si­ble im­peach­ment of US Pres­i­dent Don­ald Trump – all have an ef­fect on the global econ­omy. But some­times it is chal­leng­ing for in­vestors to make sense of it all.

The price of gold and stock mar­kets have seen record highs and the US dol­lar is strong. At the same time, the US Fed­eral Re­serve and Euro­pean Cen­tral Bank have been cut­ting in­ter­est rates, yields on $17 tril­lion (Dh62.4tn) of bonds have turned neg­a­tive and global eco­nomic growth has slowed.

The In­ter­na­tional Mon­e­tary Fund re­vised down its pro­jec­tions of global eco­nomic growth for the fifth time last month with the world econ­omy ex­pand­ing 3 per cent this year, its slow­est ex­pan­sion since the 2008 fi­nan­cial cri­sis.

Davis Hall, global head of for­eign ex­change and pre­cious met­als ad­vi­sory at In­do­suez Wealth Man­age­ment, which has €130 mil­lion (Dh527m) in as­sets un­der man­age­ment and of­fices in Abu Dhabi, Dubai and Beirut, says we are in a “mar­ket that is com­pletely up­side down”.

While Mr Hall, who was in Dubai re­cently for the bank’s Mid­dle East In­vest­ment con­fer­ence, may “not have a crys­tal ball to look into the fu­ture”, he gives The Na­tional his take on where to in­vest now and next year.

QWhy are gov­ern­ments in­ten­tion­ally weak­en­ing their cur­ren­cies?

AEvery­one is try­ing to coun­ter­act Mr Trump’s proac­tive dis­rup­tion by weak­en­ing their cur­ren­cies to off­set the tar­iffs to main­tain vol­ume of ex­ports. You’ve got Switzer­land with neg­a­tive in­ter­est rates. You’ve got now the ECB that went even more neg­a­tive. And you have QE [quan­ti­ta­tive eas­ing]. Now the Fed has an­nounced an­other or­ganic QE pro­gramme. So all of this is that ev­ery­body wants to race their cur­rency to the bot­tom. What is really in­ter­est­ing is if you look at the year-to-date re­turns on cur­ren­cies and pre­cious met­als, the top four vis-à-vis the US dol­lar, are palladium, gold, sil­ver and platinum.

Non-yield­ing phys­i­cal as­sets are out­per­form­ing the pa­per fiat cur­ren­cies, which are es­sen­tially IOUs. For the sec­ond year run­ning, we’re see­ing a se­vere out­per­for­mance as gov­ern­ments and cen­tral banks in­ten­tion­ally weaken their cur­ren­cies to try to create de­mand and ex­port-driven sup­port.

Now, that is really, really dan­ger­ous. Be­cause this game is a lose-lose for ev­ery­one. Even the Bun­des­bank [Ger­man cen­tral bank], for the first time in 51 years, has started to covertly buy more gold. So, there is a lot of head scratch­ing and peo­ple need the sup­port and com­fort of some­thing in their port­fo­lio that will safe­guard them as a shock ab­sorber.

Is now the time to buy gold? We’ve been very, very pos­i­tive on gold. And this sum­mer it sort of had a supernova ex­plo­sion. [But] is it too late to jump in? The more you look into the sup­ply and de­mand, the more the un­der­ly­ing fac­tors are ex­cep­tion­ally sup­port­ive. If you look at the de­mand story, cen­tral banks are buy­ing gold more than ever. They bought the most in 49 years last year and the first half buy­ing of cen­tral banks col­lec­tively this year has been even higher than last year.

There are only 192,000 tonnes of gold in 6,400 years of life that has been ex­tracted from the earth. The World Gold Coun­cil es­ti­mates there is only an­other 53,000 tonnes un­der the ground, be­cause more and more min­ing com­pa­nies are look­ing for rare met­als that go into iPhones or car bat­ter­ies in­stead of gold.

The cost of cre­at­ing mines is some­where be­tween $3 bil­lion and $5bn with a lead time of two or three years and you have to do it in less and less sta­ble coun­tries. So there are bar­ri­ers to en­try and there are not many mines ex­pected to come on­line in the com­ing years. If you take the an­nual pro­duc­tion and ex­trac­tion of gold it’s 3,400 tonnes per year, which means there are only 16 years of cur­rent pro­duc­tion left.

What does this mean for in­vestors?

Even though gold has reached an all-time high against some­thing like 18 cur­ren­cies – not the US dol­lar, yet – I’m con­vinced over the com­ing years it will con­tinue and has a chance to move back to­wards where it was. Why? Be­cause of bal­ance sheet ex­pan­sion and run­away deficits, which are unchecked, es­pe­cially in the US. It costs $861,000 a minute to ser­vice the ex­ist­ing debt load of the US gov­ern­ment [which stands at $23tn]. We’re reach­ing a point of ex­po­nen­tial growth in this deficit and yet in­ter­est rates are su­per, su­per low.

I’m ac­tu­ally bullish medium to long-term on gold, but short-term, gold is los­ing a lit­tle bit of its mo­men­tum. Pro­vided we stay above $1,380, we think we can move above $1,600 next year.

What are the ef­fects of QE? They are just print­ing money. Gold at the time when [for­mer Fed chair­man] Ben Ber­nanke started this QE pol­icy, un­der [for­mer US pres­i­dent] Barack

Obama, was at $900 an ounce – and we dou­bled. And it seems like when you shake the tool­box of the cen­tral banks, there is no noise any more. They’ve used up all the tools at their dis­posal and we still are not hit­ting our in­fla­tion tar­gets. We have growth that is not suf­fi­cient to pay back the debt lev­els that are al­ready high. We’re so much higher in out­stand­ing debt than we were at the Lehman mo­ment [when Lehman Broth­ers filed for bank­ruptcy in Septem­ber 2008]. So have we learnt any­thing?

Pen­sion fund man­agers, for ex­am­ple in Switzer­land or Europe, have to try to give their pen­sion­ers – who are liv­ing longer – a re­turn on their port­fo­lios and their funds. The is­sue is they’ve bought bonds that have done su­per well for the port­fo­lio, but these bonds are ex­pir­ing. And then they have cash to rein­vest. They are not go­ing to buy bonds with neg­a­tive yields and they can­not keep cash, be­cause their banks are go­ing to charge them for hold­ing cash. So what do they do? They con­tinue to buy equities and take more beta risk on the port­fo­lios than a pen­sion fund should tra­di­tion­ally em­brace. And this, I think, is go­ing to be one of the big, big is­sues when the bond mar­ket turns.

What is the dol­lar out­look? We are at the be­gin­ning of the end of US dol­lar dom­i­nance. We’ve had the first stage of the cur­rency war, which was the provo­ca­tion “Make US great again”, tar­iffs and sanc­tions. Then you had the sec­ond phase, which was re­tal­i­a­tion by the trad­ing part­ners, where ev­ery­one said “we’re go­ing to weaken our cur­ren­cies”. Now we’re mov­ing to­wards the third phase, where Mr Trump is like, “OK, how do I re­spond? I need to weaken the dol­lar, I need a trade deal and I need to make sure growth stays strong and the stock mar­ket doesn’t fall”.

But when you think about all that – they are cut­ting in­ter­est rates, the fun­da­men­tals are ter­ri­ble, the econ­omy is slow­ing, they are print­ing money and he might be im­peached – this is enough to scare peo­ple from blindly keep­ing US dol­lars. As we move into the first quar­ter of next year, the US dol­lar is very, very vul­ner­a­ble.

What is your out­look on euro? In Ger­many, with [ECB Pres­i­dent Chris­tine] La­garde’s push, we might start to see some fis­cal re­lax­ation and stim­u­lus for the first time in decades. They are run­ning a sig­nif­i­cant bud­get sur­plus. Imag­ine if they started to change this. This would create for­eign di­rect in­vest­ment into Euro­pean as­sets, which are cheap on a rel­a­tive ba­sis. So we are also, strangely enough, start­ing to sug­gest and pre­pare our clients for a re­cov­ery in the euro. Ev­ery­one has been bash­ing Europe and the euro for so long, but the fun­da­men­tals in Europe are ac­tu­ally not that bad.

What is your view on pound? There is no more cer­tainty than three years ago be­cause it looks like [Brexit Party leader Nigel] Farage and the Tories are not will­ing to work to­gether. So we’re go­ing to have an­other hung par­lia­ment, be­cause I don’t think Labour will be in a po­si­tion to reap a ma­jor­ity. Even though a hung par­lia­ment is not nec­es­sar­ily good, it also means the worst-case hard Brexit will not hap­pen. As we no longer have that tail risk, I think the pound has more sup­port than be­fore, even though the econ­omy is slow­ing. But if we get an­other ref­er­en­dum or we fi­nally get clar­ity and we have an­other gov­ern­ment that moves for­ward and de­liv­ers Brexit with a deal, that is also less neg­a­tive than the great­est fear that we all had be­fore.

A lot of Saudi cus­tomers have been hedg­ing and selling pounds, be­cause they were afraid of the worst-case sce­nario. But I just tell them, it’s too late to panic and there’s no need to panic any longer. Be­cause the pound prob­a­bly has more up­side than down­side. That is im­por­tant for peo­ple here be­cause they do have ster­ling ex­po­sure through their real es­tate.

We fore­cast a grad­ual move back in the pound to­wards the mid-1.30s … Mov­ing into next year, we might get back down to 1.25, we don’t think we’re go­ing to go back to­wards 1.20.

What’s your key mes­sage? Any­body who’s hold­ing 50 per cent in equities and go­ing to­wards riskier, non-in­vest­ment-grade bonds be­cause they need yields, should have be­tween 5 and 8 per cent gold in their port­fo­lio.

We have a mar­ket that is com­pletely up­side down, only be­cause pen­sion funds have to find yields. We ob­vi­ously want to pro­tect our clients’ wealth, so we’re ac­tu­ally get­ting a lit­tle bit cau­tious. You can stay in equities, but you have to have an eye on the rear-view mir­ror.

It seems like when you shake the tool­box of the cen­tral banks, there is no noise any more

An­tonie Robert­son / The Na­tional

Davis Hall says In­do­suez is very pos­i­tive on gold

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