Banking on a fresh approach to investment
IT IS now more than ten years since the onset of the global financial crisis and the associated collapse of Lehman Brothers, yet we still live in its shadow. Economic growth rates in many parts of the world remain below what they were pre-crisis, while central banks have engaged in practices that would have been considered anathema to them a decade ago. A consequence of these unorthodox central bank policies is that asset prices have risen. Quantitative easing involved direct central bank purchases of government bonds, driving prices up and yields down; this encouraged the former owners of those bonds to use the proceeds to purchase more risky assets — often equities and corporate or high yield debt — the prices of which were also bid higher.
The theory behind this practice is that by encouraging investors to move up the risk curve, it would reduce the cost of risk taking in the real economy and stimulate activity. There is indeed some evidence that it helped.
However, we are now at a juncture where central banks are starting to reverse these emergency measures. The policy interest rate in the United States has now increased eight times since December 2015 and is expected to move higher by another 0.25 per cent when the Federal Open Market Committee next meets on December 19. Moreover, the Fed is in the process of shrinking its balance sheet. The Bank of England has also hiked rates, albeit less aggressively than the Fed, and has signalled that it is keen to do so again, Brexit notwithstanding.
The ECB has indicated that it will end its asset-purchase programme by the end of the year and that it may hike rates towards the end of next year.
So the monetary policy environment we are in today is very different from recent history, when central banks were universally expanding their balance sheets. This removes a pillar of support for riskier assets and helps explain the recent market volatility. That volatility has been compounded by noise associated with US-China trade tensions, Brexit and the stand-off between Italy and the EU regarding the former’s proposed budget. It is also true that there are signs of the global economy slowing.
Against this, investors should balance the fact that, while slowing, global growth remains positive and inflation adjusted interest rates are very low. Such an environment is generally supportive of corporate profits, which in turn underpins riskier asset such as equities.
During periods of volatility, such as the one we have recently experienced, it is human nature to want to pull back and reduce risk. Such decisions should be based on sound analysis of the circumstances rather than panic.
With particular regard to the UK, the unique situation of Brexit has resulted in widespread volatility, including in residential property. Associated political uncertainty has been a cause for broad public concern.
In pursuit of capital preservation, global private banks like EFG, who have a multi-jurisdictional presence, are witnessing increased demand from UK clients looking to diversify their asset base and hold funds in other international locations, and in other major currencies.
Daniel Murray is deputy chief investment officer and global head of research at EFG. EFG International’s global private banking network operates in around 40 locations worldwide, including Zurich, Geneva, London, Channel Islands, Monaco, Luxembourg and Hong Kong