Riding the waves of a volatile environment

From Wealth Management / Profiles 04 May 2011

Gérard Piasko, Sal. Oppenheim

By Yuri Bender

Gérard Piasko was until recently a board member and chief investment officer at Julius Baer. But he crossed Zurich’s Bahnhofstrasse soon after the financial crisis, to the Swiss arm of German private bank Sal. Oppenheim.

He was initially recruited to head up investment strategy at the then independent bank. But Mr Piasko has been promoted rapidly onto the bank’s board, while Sal. Oppenheim bank itself has been absorbed into Deutsche Bank’s expanding financial empire. Mr Piasko, however, has been given the green light to pursue a unique, private client-centred investment strategy, staying separate from Deutsche Bank’s highly industrialised Frankfurt-based product factory.

Many of your private clients come from Germany and the ultimate headquarters of your bank are based there. That country has enjoyed a recent resurgence as Europe’s best-performing economy. Will this continue?

I hope for the overall European economy that the German mini-miracle of the last 12 months will be prolonged. In the last 10 years, the German economy has made strong progress, compared to other European countries, in productivity growth and lower unit manufacturing costs, which started from a very high level.

With the introduction of the euro, other European countries, with the exception of Italy, benefited from lower funding costs, because the interest rate came down from being part of the European umbrella.

Germans reacted by working more, but the flipside of the coin was that they ended up getting paid less money for the time they worked. The market share of German companies in the world improved, but consumption growth lacked the success of German exports. This shows us a major risk for the German economy: in the case that export growth slows, consumer spending has to offset that and this is a confidence thing.

Confidence in Germany is on the way up, as both the global economy and employment situation is relatively healthy for consumer spending, compared to other European countries, where numbers of jobless are much higher. But if sentiment takes a temporary setback, consumer spending could suffer.

The only way forward for Germany – and France – in an environment of rising global competition, is to have better quality products, manufactured in a way which finances enough employment and can compete with Asian markets like Korea, and increasingly China and India. The answer will lie in building German cars or French luxury goods. If you have to make higher-cost products, the quality must be higher. The same can be said about Swiss banking.

How have key risk factors affected your equity allocations for private clients?

General global risks are on the rise. How do you respond to that? Even before the Japan earthquake, we decided to go underweight equity, which means reduction below our long-term neutral level. The main geopolitical risk comes from the Middle East, where oil prices have to have a risk premium. The potential of danger to supply justifies another $10 (E6.9) to $20 higher oil price.

The second looming problem is the rate-hike risk. Bond markets have an increasingly build-in inflation risk premium and there is a rate-hike risk in all parts of the yield curve. But equity markets did not build in this risk premium for the interest-rate hike in Europe, when we decided to reduce our allocation.

We parked the excess money temporarily in cash, because a correction can happen after a long-lasting rally. This can be hefty and you need to have cash ready to invest once the correction is over. If you have a probability with a huge impact, such as a nuclear reactor spreading radiation and affecting millions of people, you need to be aware of that. Last year at Julius Baer for instance, we decided the financial sector should be avoided. We had considered the regulation risk and the highs of 2009, combined with the probability of peripheral European economy debt risk, coming onto the P&L of financial companies in the future. Because these probabilities were big and not priced into the market, we decided to stay away from financial stocks.

Which equity sectors do you favour in the current volatile global environment?

Japan’s nuclear issue and the rising oil price are inextricably linked. If now Germany and potentially the US, where nuclear energy represents 20 per cent of total electric power, Japan even more, make the democratic decision to reduce availability of energy from nuclear power plants, something has to substitute that. Although we all hope solar and wind power will be more in use in coming years due to carbon emissions, the amounts being produced are too small to offset nuclear power dependence. There are only two types of energies which can realistically replace this. The dirtiest is coal, and nobody wants to go back to the smog of 19th century Britain.

After a certain temporary setback, due to Japanese GDP concerns, we would not be surprised to see the oil price staying on an elevated level for longer than many people think, because of the need for substituting nuclear energy in the coming years, until we have enough solar and wind usage.

Back in February, we decided to increase exposure to our favourite sectors in European equity, being oil and gas stocks. But the oil price in 2010 increased much more than the price of oil stocks in Europe, with the net result that the European P/E multiple for 2011 for oil and gas stocks is below 9, which we think is a promising risk-reward trade-off.

What is your view on allocating between emerging and developed equity markets?

It looks like the emerging markets correction, which started much earlier than the correction we have seen recently, has brought valuations of emerging and developed market equities to similar levels. Where do you have the better probability of good growth in the next couple of quarters or years? Emerging markets should not be underestimated here, particularly in their ability to stimulate growth after a slowdown or a tragedy such as the Japanese experience.

As a chief investment officer, what were the main lessons you learned from the crisis of 2008?

The crisis taught us two lessons. Firstly, you need liquidity, which enables you to tactically adjust your overall risk level quickly enough. Therefore, a daily liquidity on an exchange-listed structure gives you an advantage. But even more importantly, we learned that once globalisation reaches such intense levels as we have got today, a crisis can dramatically change correlations. So to ensure the diversification of different asset classes, you need to be prepared for tactical rapid responses to changing macro-economic environments.

Our ‘Go Far’ maxim is about focused, active and most importantly, risk-oriented investing. There is currently so much information, with crises affecting Egypt, Libya, Japan and Bahrain, that you need a helicopter view to focus on the big picture trends and tactically undertake these rapid responses. We see it as a mixture of playing chess and surfing. You have to ride the wave of the trend, but not go as far as the last point, where you cannot jump away. You are playing chess, because you need to focus on the market’s next two or three moves and have scenarios ready with certain probabilities. Then you’re ready to make your move.