Currently the managing director and chief investment officer of Merrill Lynch Global Wealth Management in Europe, the Middle East and Africa (EMEA), Gary Dugan has been in the financial business for more than 25 years — previous positions include managing director and global markets strategist at JPMorgan Institutional Investment Management and the Private Bank, and managing director and head of research and investment strategy at Barclays Wealth. Executive had the pleasure of a candid, one-on-one interview with Dugan after his ‘Year Ahead 2009’ presentation in Beirut, to discuss the effects of the global financial crisis on the region’s markets.
E How has the global financial crisis affected your operations in the Middle East? How have your clients been affected?
We found that clients have moved from being quite aggressive risk takers — so they were prepared to buy in emerging markets and local equities — and now they’re much more risk averse. If you look at the kind of marginal investment they are now making, it’s more in cash and gold — very, very safe investments. So I think their whole appetite for risk has changed and dropped quite dramatically. I would say that both the revenues and the scale of the assets that are available there for our business has dropped quite dramatically. But I think people in the past might have wanted to do it themselves, because it just seemed so easy — you went and bought a building one week and the next week you went and made 15 percent. They now realize that it’s not that easy and they need more advice. We’ve never seen so many people come into our presentations, we’ve never had so many phone calls, as people want to talk through what’s going on — they need advice, greater advice then we’ve seen for some time.
E Has the Bank of America acquisition of Merrill Lynch affected your operations?
I can’t comment, sorry.
E Where do you see the greatest opportunities for growth in the MENA region?
I suppose by country, in terms of the robustness of the business, it’s countries like Saudi Arabia and Kuwait in particular. Purely because the economies there have got even greater support from their governments, they’re holding on to their GDP, the local economies are more insulated from the outside world and if they do have internal problems there is sufficient government resources in order to stimulate the economy. I suppose the one disappoint we’re seeing at the moment — but it was coming — is Dubai, because you see this heavy reliance on cash flows from the central bank and from Abu Dhabi, which have a question mark over them. Also, because people have been so heavily leveraged into property, once property collapses they really have no wealth or free cash flow left. So the opportunities are going to be difficult in the future, but there are still some stronger markets that we’re seeing elsewhere in our franchise.
E So how do you think markets like Dubai can recover? With the economy of Dubai so dependent on its property sector, what are the key components to help them recover in the future?
Well, you hope that people have learned a lesson — that the kind of one single asset that they were playing, they realize that they need diversification and a more international perspective in the way in which they invest. So we’re hoping that when they come to us they’ll be thinking, “If I’m going to stay in property, maybe I’ll look at London, New York, or other places. Maybe I’ll think about buying bonds to settle offside my very high risk asset in property.” So we’re getting a greater diversification of assets, we’re talking to our clients about more asset classes and more vehicles than we’ve ever done before. We’ve already had a massive pick-up in interest in commodities just from this visit as people see that as the opportunity — not to make huge amounts of money, but to provide some diversification against the risk they still have in their illiquid investments.
E What do you foresee as the most difficult challenges in the next 12 to 18 months?
I think in the immediate term the biggest disappointment will be a sense that 2010 is not going to be that much better. The growth in that year will be around the world only about one to 1.5 percent, whereas people had hoped we’re going to go back to the four and five percent numbers we’d had before. The second thing is — and this is a dramatic shift from where we’ve been for the last 20 to 30 years — so much less inflation around the world, even here in Lebanon you may be talking about inflation rates that get down close to zero — in the developed world, numbers that are negative, and again, whilst Japan has been the one country that has suffered that and struggled with it, we could see the whole world struggling with it. So it means a different environment for the way people live their lives — you have to go and ask for a discount everywhere, you’re going to have businesses that are unfortunately going to have to lay-off more staff to take down their cost base — so it is a very big change that needs to be underway in 2009.
E What strategy will Merrill Lynch be using in 2009 to increase risk and investment appetite amongst their clients?
I think there’s a wholesale change inside the banking industry. Clearly mergers mean companies need to get to know each other again and change is inevitable. I think what we’re going to have to work very hard to do is: one, you’ve got to start to re-invent the investment proposition for clients, because people will be less certain about the future, they’ll be more nervous about the investments they make. So we’re going to have to focus more on, what I call, the safer, traditional investments of bonds, be more prudent and away from investments that were made in the past in things like structured products and derivative instruments. The second thing is — and this will come in two ways in the sense that in the past it was fairly easy to sell something — in the future you’re going to need to do a great deal more work with the clients providing very strong guidance. That to me is much healthier as the clients will be more aware of the risks they take on in certain investments and they are more involved that way.
E Do you think it will be easier now to identify toxic assets or risky investments since the fallout of the global markets?
My secret hope is that… regulation saves the clients themselves. I’ll be honest with you, in my whole career there [were] many times where you advise clients not to do things but unfortunately people get so excited with the tops of markets — like the Dubai property marketing doubling. As we saw back in 2000, people thought technology stocks were going to give 30 percent returns every year for the next 100 years and it didn’t matter what you said to clients, you couldn’t stop them from doing it. I say we’ve got our own role to play in saving humans from their own faults — call it greed or whatever you want — but we’ve got to try and stop these bubbles from forming in the future. It can’t just be done by investment banks, it’s got to be done by heavy regulation.
E So would you say that global investors are in need of a reality check?
A desperate reality check! But as I said, I think there should have been a reality check after the huge losses in the tech bust. Yet, just five years later people were making even bigger mistakes with more money. So I just sense that we’ll get more bubbles in the future and we’ll go through some of the cycles again. I just hope that the next cycle doesn’t take the financial system down as it has done at this stage — this is a very dramatic deterioration and it will take many years to repair.
E Do you think a major mistake made by investors in the past is that they were only thinking on a short-term, profit basis?
I think it was simpler than that. I think what we had over the last 15 years — because of central bank policy and principal in the US — was that any time the markets got into difficulties, they were bailed out. If you were patient enough to wait one or two years, whatever you bought would have gone up to the price you paid and beyond it again. It wasn’t quite the case in the technology sector, but that was the insurance policy you had and then they realized this time around there was no insurance policy. The insurance policy would have had to have been so big that it would have been bigger than this planet, quite honestly. So I think that is the wake-up call, that the huge speculative booms we had are the past and that the insurance policy is no longer there. People require higher return from things but they’re also going to have to be far more patient. The other important point is that in the past, the saving that went on was very, very modest. Around the world, in the future the saving has got to be greater because the available returns are going to be smaller. That’s good news for our industry — we should see more cash inflows — but clients have got to reset what they hoped for.