Private Bankers Aren’t on the Same Page

By David Bain

Private bankers have conflicting views on where investors should put their cash.

All 10 of private banks surveyed by Dow Jones Wealth Bulletin in a quarterly survey of their investment views agree the global economic recovery was well under way in big developed economies and emerging markets.

Agreement among them even extends to the type of recovery the global economy is experiencing, with all them saying the recovery is expected to be weak among the developed world. They say deep structural problems, huge debt overhangs, and weak private-sector activity will limit the recovery.

Wealth managers are more sanguine on emerging markets, believing economic activity will be stronger in the big ones like China, India and Brazil.

But that’s where the consensus ends. Equities might be liked by most private banks now, but there’s little agreement on what’s driving the current rally – and, most importantly, the likely direction of stock markets.

Some argue the rally in global equity markets is no more than a result of an abundance of liquidity, rather than a fundamental recovery story.

These skeptics say with interest rates at close to zero in many of the big economies, money is being forced into “risk assets” because cash is not an alternative.

The pro-equity wealth managers disagree, saying with valuations of many equities still cheap, the rally is driven more by fundamentals rather than an abundance of liquidity. This leads them to argue the rally has someway to go and clients should be invested.

Again, a similar split exists with wealth managers’ views on bonds. Although the private banks surveyed don’t like government bonds - the poor state of public finances militates against sovereign issuance – they don’t agree about investment grade and high-yield bonds.

Some say corporate bonds have exhausted most of their potential in the current rally, others like them, arguing that both investment grade and high yield bonds present good opportunities.

A similar spit exist between private banks’ investment views on commodities, hedge funds and real estate, although most are negative toward cash.

Confusion doesn’t breed confidence in markets. This might be why many private bank clients still maintain their preference for low-risk assets as they wait for more certainty after being uniformly bearish in the two years to March, and frequently bullish in succeeding months.