Investing and managing with a long view

Alexandre Tavazzi, Head of CIO Office and Macro Research, Pictet Wealth Management

The view over the next 12 months:

The global growth picture is very divided. We expect growth of about 2 percent in the US, with the euro area barely growing, Switzerland looking slightly better and China expanding by about 4.7 percent. But remember China: used to grow at 8-10 percent per year, so 4.7 percent is not a high growth rate.

US consumers by and large have fixed their mortgage rates, so rising interest rates have not hurt them. This is helping support US economic growth. China is facing structural issues due to troubles in its housing sector, which accounts for about a third of the Chinese economy. Europe is a mixed bag, with the south profiting from the post-pandemic return of holidaymakers and Germany hurt by the loss of access to cheap Russian energy and the slow growth of China, one of its major trading partners.

Slowing inflation and higher interest rates mean that investors today are benefitting from the rise of interest rates. For investors in USD, cash is an option as the market is paying 5 percent. On equities, we are neutral, noting that there is a very high concentration of performance among a small number of companies. We like gold, which is supported by strong demand from central banks and sovereign wealth funds. It is also a hedge against adverse geopolitical events. Private assets are a very important part of our asset allocation approach. We are selective but positive on coming vintages.

Dr Maria Vassalou, Head of Pictet Research Institute, Pictet Group

We are living through a highly uncertain period of our history. Having gone through decades of expanded trade and globalisation, we are now seeing a partial reversal to this process driven by the following two realisations: Globalisation increased global prosperity but also made countries much more specialised which proved to be economically costly. When the financial crisis struck, countries that were very specialised showed less economic resilience. Countries that had a diverse economic structure, like the US, bounced back much faster. 

Later, during the pandemic, we saw that as a result of globalisation, production lines were compartmentalised, and so when markets started closing, we saw shortages of goods around the world. This resulted in a rethinking of production lines towards nearshoring, onshoring and the reindustrialisation of some countries who had become too services-oriented. We are seeing a new geopolitical environment emerging which I like to call Cold War 2.0. Unlike Cold War 1.0, where two political systems, capitalism and communism were competing to exhibit their respective superiority, with nuclear armament acting as a deterrent, the goal of the competing powers is now mainly political dominance. We see that clearly in the alliance that has emerged between  China and Russia following the invasion in Ukraine, and the upgraded collaboration among the BRICS Plus against the Western bloc. 

As an over two century old Bank, we are focused on understanding how the world is changing and the drivers behind these changes in order to be able to effectively adapt our investment philosophy going forward. For instance, when it comes to debt sustainability in the US, we see that debt-to-GDP has doubled in the past twenty years from about 60% in 2000 to 120% now and it is projected to continue growing. At the same time, there is little room to reduce public spending. Yet, the US dollar continues to be one of the strongest currencies and US Treasuries are considered among the safest and most liquid assets in the world. The question is: how long can the US continue increasing its debt while remaining the world’s prime safe haven? What is the end game?  The answers to these questions have profound implications for the value of the US dollar, the role of US Treasuries and the way we build portfolios. 

At the other end of the spectrum, it is important to periodically revisit whether the way we construct portfolios remains optimal. For example, the profession has been accustomed to be thinking about investments in public and private markets separately. That may have made sense while private markets were a very small percentage of the overall activity in the economy. This is not the case anymore. More and more businesses are choosing to stay private. And the way forward may be in building holistically optimal portfolios. One of the things the Institute will be engaged in is in rethinking our investment framework so that our portfolios we construct continue to provide upside capture with downside protection in these increasingly uncertain markets.

Elif Aktug, Managing Partner, Pictet Group

As a private company ourselves, we understand private markets quite naturally. When investing, one needs to think about diversification and not put all the private assets you might be exposed to (e.g. a private family-owned business) in the same bucket as your private asset investments in your investment portfolio. Including private assets in your portfolio first and foremost generates uncorrelated returns.

Within private markets, which represent around 80 percent of the economy, you get access to companies that are not available in the listed space. A number of start-ups and innovative companies tend to, by nature, only be available in private markets. Today in particular, there are some areas like the combination of biotech and AI that are super exciting – and these are only accessible in private markets.

And then there is the value creation aspect. Whether it is in real estate, or in private equity, one needs patience to see this value creation realised. Taking an asset and, for example, making it more sustainable – among other levers – that is where the excess returns come from.

When building a private assets portfolio, one needs to be selective; secondly, one needs to bear in mind the illiquid nature of those investments: we should not try to make the illiquid liquid. You need to have patience in that locked up capital for the value creation element to come through and generate returns. And finally, one cannot do this in a stop and go fashion: if you want to target private asset allocation over time, you need to start a programme, and you need to continue and have exposure to successive vintages so as to build a diversified portfolio.