Making sense of the macro

Julius Bär’s chief economist helps explain global economic trends

So, the Labyrinth is a piece of cake, is it?

For an extended interview with Janwillem Acket, read this.

 

To say that playing the global economy makes for a tricky game may be the world’s biggest understatement in the best of times. These days, however, the vagaries on the monetary and financial fronts extend far beyond the normal chaos that supplies the chat fodder for economists and gives investors the urge to get some professional help in devising their portfolio strategies and allocations.

For example, analysts and investors have over the last three or four months increasingly been left with attempting to decipher the US Federal Reserve’s intentions out of foggy wordings such as its latest statement addressing its crucial interest rate outlook on September 17, whereby “it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends.”

Vis-à-vis the Fed’s statements reside the pronunciations of the European Central Bank, an example of which was ECB President Mario Draghi’s August 22 Jackson Hole speech on needed action for improving the European employment rate. Draghi’s position was interpreted widely as a signal of impending quantitative easing (QE) in the EU and thus appeared to imply European divergence from what the US is about to do in ending their QE and in kicking interest rates higher “at an appropriate time”, alias H1 2015.

KYSB: Know (a bit about) Your Swiss Bank

Julius Bär, a Zurich based private bank with CHF 274 billion ($292 billion) in assets under management at mid 2014, has the distinction of being a centenarian maverick. The financial institution is preparing to celebrate its 125th anniversary next year, but only in 2005 embarked on a journey to penetrate emerging markets, with a special focus on Asia which the bank describes as its second home market and a place where it aims to realize long term growth ambitions.

The top brass of Julius Bär sometimes quips that they face occasional misperceptions by people who are looking for a wetter venture and Executive’s photographer actually made his way initially to Julep’s bar in nearby Uruguay Street when seeking their downtown Beirut offices. But even before it strategized expansion into the Middle East as part of venturing into foreign growth markets, the bank was not a total unknown and specifically some individuals and family offices in the “highest tiers of investors” were familiar with the name, claims John Dagher, the chief executive of Julius Bär (Lebanon).

When he worked on the group’s Middle East development out of Dubai after joining Julius Bär in 2003, the bank was still “a mainly German speaking bank for central Europe,” he tells Executive. This has changed in the past few years, but Dagher concedes that “we are still developing the brand, building up the image and reputation.” While the Beirut office is formally a new establishment, the bank has a strong angle on the Lebanese and expatriate Lebanese wealth market as Julius Bär two years ago acquired the international wealth management business of Merrill Lynch.

The private bank’s office in downtown Beirut is where Merrill Lynch used to be based and the furnishings in some of the rooms are presently still the same as they were in the ML era — interestingly installed under Dagher’s supervision, who worked with ML in Beirut before his move to Julius Bär. The transfer of assets under management from the ML platform to the Julius Bär platform on the other hand has already been completed in Lebanon. The bank has 17 employees in Beirut and is recruiting. “We are part of the emerging markets expansion strategy of Julius Bär. Our bankers cover Lebanese clients in Africa, in Europe, in Lebanon and in the GCC,” Dagher assures.

Bring in the expert

The divergence between the Fed and European central banks can be explained by the divergent speeds of their economies’ respective developments since the 2008 recession. But to truly understand the reasons for this disparity, it serves to know how the mandates of the Fed and ECB differ, says Janwillem Acket, the chief economist of Julius Bär, a Swiss private bank (see Q&A).

“As you know, we very clearly have a different setting in the US from Europe. The US situation is advanced when compared to Europe, which is cyclically lagging,” Acket confirms. He views this US advantage as rooted in the response to the 2008 crisis under then Fed chairman Ben Bernanke, which was very swift and coerced the shocked US economy back on a growth path. By contrast, the ECB lacked a mandate other than ensuring price stability a la Deutsche Bundesbank, the German central bank which Acket describes as the blueprint for the ECB.

Due to the Fed’s dual mandate — a politically motivated mandate for full employment next to a mandate for price stability — and greater freedom to act, the Fed according to Acket could work the crisis with greater efficacy than the ECB, which moreover had to grapple with the fallout from what Draghi in Jackson Hole called “a second, euro area-specific shock emanating from the sovereign debt crisis”.

As the ECB made efforts to alleviate this second crisis, measures attempting to achieve macroeconomic stabilization were impeded. In Draghi’s words, “Sovereign pressures also interrupted the homogenous transmission of monetary policy across the euro area.”

Acket explains the ECB’s quagmire rather more directly. “The Eurozone is a fragmented entity when it comes to banks and legislation regarding national banking markets,” he says, and this exacerbated the lack of having a mandate beyond guarding price stability. This fragmentation made any idea of using QE as a tool for recovery from the crises “a very complex procedure,” which contributed to today’s conundrum, Acket says. “I would say the US is almost three years ahead of the ECB in tackling this post crisis pattern and trying to bring the economy back onto a stable, cyclical recovery.” 

Guiding investors 

According to Acket, there is a high potential for uneasiness in the markets and a volatile period of transition once it comes to a confluence of impacts generated by the ECB’s recent moves with the expected Fed tightening, which Julius Bär’s team of economic analysts anticipates, like pretty much everyone else, for some time in the first half of 2015.

From equity markets, Acket expects a correction due to the discounting of the Fed’s rate move, which will likely occur in advance of the actual event, as has historically happened before such measures are implemented. 

For other expectations, the economist sees growth in the US as strengthening and says that this will translate into an increase of American bond yields, which will spell difficult times for bond holders. High yielding corporate bonds will surge, he says, but investors must not forget that desire for higher yields requires accepting more risk.

“We thus see rather more chances for investors in the entrepreneurial camp than in the sovereign bond camp,” Acket says and encapsulates the guidance he offers Julius Bär clients in adding, “I think the best return on investment is from blue chips, from very good companies that are well run and are dividend champions in their field. They can now offer you dividend yields that are even superior to bond yields and, as they are widely diversified entities in many markets, they offer you some safety as an investor. Their default probabilities are rather very low and that is the game to which we are actually trying to guide our investors.”

Hints of passion

Visiting Beirut for encounters with investors and a closed door dinner presentation at the Phoenicia Hotel for the bank’s clientele, Acket’s comments on the interplays and incongruent timings of actions by central banks, economic agents and political stakeholders evoke a strong impression that he is approaching his job from an angle of passion. He says he benefits from a mandate, not found everywhere in the strata of bank employed economists, to freely comment on macroeconomic issues with strong support from his employer.

“I am not an economist from a system relevant bank, but the guys in the system relevant banks, many of whom I know personally, like to deal with us and sometimes like to [hear] our views because as they sometimes tell me, they are more censored whereas I am more the exotic example,” he says, comparing himself to a jester who in the European Middle Ages had the privilege of saying what needed to be said, even if it meant conveying inconvenient truths.

When approaching Rafic Hariri International Airport in early September 2014, his thoughts went back almost 50 years. “My first impression of coming to Lebanon now is one of admiration, because I have seen pictures of how the place was smashed up. I am saying this as a foreigner with a childhood memory of the old souk. I went through the old souk on the back of a Lambretta with my brother. He was nine years older than me and had a license for a scooter and so he took me on the back seat and we rolled through old Beirut and it was fascinating,” he says.

Acket emphasizes the non-dogmatic approach that the bank and he himself practice in dealing with the region. But as he remembers Beirut as his first hometown that he left in tears, his visit here is not that of an uninvolved talking head to a curious place on a travel itinerary. This adds gravitas to Acket’s belief that the Swiss model of pragmatism, coexistence and mutual respect is one that Lebanon could actually apply.

Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years.

*

Top