Despite equity markets collapsing this summer HSBC private bank’s HNW clients have not overreacted by initiating wholesale sell orders because they can afford to handle today’s volatility, helped by the fact that their portfolios aren’t too concentrated. That’s the opinion of Jean-Christophe Gerard (pictured), CIO of HSBC private bank.
“Our clients were not overloaded with equities when the markets started falling. They had “some” equity allocation but it would be wrong to think they were overweight or leveraged: strategic allocation is around 35 per cent for a balanced portfolio. They’re well aware that equities are cheap and can afford to hold on to them. They’re well diversified across sectors and geographies even though they have a bias towards US equities. They’re also holding securities of European companies that benefit from Emerging Market growth,” comments Gerard.
Gerard confirms that the bank’s daily trading statistics show that during some of the biggest market swings recently there were more buyers than sellers. Proof indeed that equity markets are swamped with fear and uncertainty as opposed to valuation concerns: buying opportunities are out there. He points out that 2011 is nothing like 2007 when clients aggressively sold off their positions “because everyone was leveraged. Today it’s very different.”
Gerard says the bank has been advising its clients not to go into EM equities due to inflationary fears as opposed to any particular growth concerns. Recommendations are “too early” right now he says.
“For emerging markets it’s more a credit play on the quality of liquidity and fundamentals rather than an equity play on valuation which can be affected by inflation. For the coming months we’ll hold this view until we see a clear turnaround in emerging inflation and risk aversion,” explains Gerard.
Clients have been told by HSBC to allocate their portfolios into EM debt – be it investment-grade hard currency debt or high yield debt – and steer clear of European peripheral debt in places likes Greece and Ireland. Clients have, says Gerard, been following this advice closely. EM local debt is also advised even though it’s more expensive. “Local debt is a bit more difficult because some emerging currencies are weakening but this creates good opportunities,” says Gerard.
As for allocation into alternative assets, Gerard stresses that clients understand the hedge fund world a lot better since the crisis, particularly in regard to liquidity issues. To capitalise on the recent swathe of new high pedigree fund managers, many of whom have spun out of proprietary desks, HSBC has launched the Next Generation Hedge Fund Programme: a mandate targeting new high-quality funds.
“We’re currently in subscription mode and there’s a lot of interest from our clients who understand that this vehicle fits today’s new world of hedge funds.” That said, Gerard expects allocation into alternatives to be flat this year. “If it was 15 per cent last year I think it’ll be 15 per cent in 2011 also. But people will switch to the right products like Next Generation when launched: it’s more a switch in portfolio allocation rather than an additional weighting.”
Natural gas and oil are very much off the agenda when it comes to commodities this year. Unsurprisingly, Gerard confirms that these days “it’s just gold, gold, gold”. He sees no catalyst for stopping the gold rally, particularly given that the Swiss National Bank recently devalued the CHF by pegging it to the euro at 1.20. “Clients are looking for refuge in flight-to-quality assets. The CHF has very little chance to improve due to the peg so they’re still buying gold, even if it becomes volatile!” says Gerard. He says that there is some demand for industrial and agricultural commodities with EM GDP growth likely to remain strong, at least compared to the West, but adds that “it’s more of a long-term play”.
When asked about short-term allocations Gerard says that right now it resembles a barbell. On the lower risk side the bank has come up with some cash proxy products with maturities ranging from one to three years paying clients LIBOR plus a percentage in exchange for a bit of risk. On the higher risk end of the barbell HSBC advises clients to take profit from today’s high market volatility conditions, be that through equities or currencies.
“We structure notes with a short volatility component. Currency products are also proving popular. For example, we advised when the SNB pegged the CHF at 1.20 vs the euro that you could buy some one-month Swiss dual-currency deposits linked to the 1.20 peg with 10 per cent returns per annum and low risk because we believed the SNB will protect this peg over the coming weeks/months. There are still some good short-term opportunities for clients to make cash returns,” explains Gerard.
The bank has had to develop new FX solutions for clients who it seems are becoming increasingly disillusioned with traditional currencies like the USD, euro and sterling: referred to fondly by Gerard as the “three ugly sisters”. Clients have the choice of either investing in funds or as Gerard explains: “We can adapt their portfolio based on our views and allocate directly into FX. We favour the Chinese yuan, Indonesian rupiah, high quality currencies like the Singapore dollar whilst in Latin America we like the Brazilian real and Mexican peso. We think these currencies are a high conviction play and will recover strongly after September’s losses.”
The Eurozone’s ongoing political problems and what impact this will have on currencies are key concerns for HSBC’s HNW clients. “Our message is that if you diversify, buy high quality and high yield companies and currencies with strong fundamentals you’ll get through this crisis,” concludes Gerard.
