The fall in inflation, a downward trend in interest rates, geopolitical events, and the elections in many countries, first and foremost the US - all these factors are expected to affect stock markets and investments during the current year, after a positive year for the markets in 2023 (less so in Israel).
For the time being, it seems that optimism still prevails on the US stock market, with the S&P 500 even reaching a new peak, led by the big tech company stocks, as in 2023. Swiss bank Banque Pictet & Cie SA , which specializes in wealth management, picks out the most prominent trends in the investment world this year, and its CEO in Israel, Moran Alon, in her first interview since taking up the position last year, provides insights and ideas on where to put money.
Banque Pictet was founded in 1805. Today, it is Switzerland’s second largest bank, and the biggest private bank in Europe. The bank is owned by eight partners, and it has $700 billion in assets under management. Pictet provides wealth management services and asset management, but not commercial banking services such as loans.
Pictet began its activity in Israel in 2000 and opened a representative office of the bank in 2013. The Israel branch, has eight employees, and is one of 30 branches worldwide. Its services cater to the very wealthy; the minimum amount for opening an account at Pictet is $5 million. The bank’s target clientele hold higher amounts. It is estimated to have some 200 customers in Israel. The coverage for the Israeli client market is done both from Israel and Geneva, by a team of dedicated bankers that are based in Geneva and travel to Israel on a monthly basis.
"Pictet takes a long-term view. Arising from 218 years of activity, the bank believes in long processes, building relationships with customers and perspective," Alon told "Globes". "The bank is dedicated to protecting its customers’ money, and because it does not have commercial activities, the bank has capital adequacy like no other. What happened last year to SVB and Credit Suisse made customers realize how important the strength of a bank is."
Alon recounts that, in the first years of Pictet’s activities in Israel, the focus was on "old money" - prominent wealthy families in the Israeli economy. "Over the years, the bank worked with the family, with a great deal of activity focused on the transfer of wealth between generations: training the next generation that was inheriting the money, to educate it about the stock market, and the right instruments for investing," she says.
In recent years there has been a change. "We have moved from ‘Start-Up Nation’ to ‘Scale-Up Nation’. As a result, the bank has more work with clients aged 30-40 who made their wealth in recent years, mainly in technology. The new layer of entrepreneurs that has arisen here has dramatically changed the way in which foreign banks see Israel, which has become a strategic and attractive target."
Currently, about 50-60% of Pictet’s customers in Israel are high-tech entrepreneurs, while the classic "old money" customers represent only 30%. Another customer segment is new immigrants, from the UK, France and Belgium among other places. "One of the most significant elements of management for a customer is to listen and understand what their needs are and what investment best meet those needs," Alon says.
"A manager who makes 15% above market has taken an unnecessary risk"
The bank’s customers spread their risk and hold assets in Israel and abroad. "Because of the geopolitical risks in certain countries, customers seek to maintain a safety cushion overseas," she says.
What has been the effect of the war in Gaza?
"In the past year, we found that there were customers who, before the war, had put all their money in Israel, but because of the war, and before that the judicial overhaul, took money out of the country, in amounts from $500,000 up to several million. We believe that taking money out of the State of Israel ultimately weakens the economy. Pictet has a long-term position on the State of Israel, and there is a huge significance to a strong economy that supports business and technological development. Despite the war, Israel is still the Start-Up Nation."
The bank provides customers with wealth management, investment, and banking services, and examines the right place for the client to invest, in terms of taxation and transferring between generations (a personal account, a fund, a so on) - examining their needs and investing accordingly. "When you invest through a large institution, it is sometimes like a drop in the ocean, but with us the client’s investment has an impact," Alon says.
"Our high capital adequacy also distinguishes us, and we have learned over the past year that anything can happen - the number of bank defaults in the US has reached 500 a year, and customers want the money they have worked for to be in a safe bank, without a default scenario."
Alon admits that the Israeli market is saturated. "Everybody’s here - local, American, and Swiss banks." So how do you reach the relevant clients? "Every banker builds a network for themselves. Existing clients help them. They follow the financial news, meet many people in order to understand what is happening - which companies might be sold and who has completed raising money. You have to be very connected to the market."
Don’t clients prefer large banks that have both commercial activities and investment banking?
"Usually, clients with capital in the tens of millions of dollars, who are our target customers, work with more than one bank in order to spread risk. So they work with a commercial bank and alongside it with a bank like Pictet."
How does the average customer, in so far as there is such a person, allocate their capital?
"It really is terribly personal for each customer. Each one has a different profile: how much they like or hate risk, the returns they expect, their liquidity needs for the coming years, and how much volatility they want in their portfolio.
"Today, a conservative portfolio is made up of about 30% equities and 70% bonds. On top of this are investments in private equity that are long-term and with double digit returns, but they are not liquid; and hedge funds, which are very tactical and specific investments, which complete the portfolio.
"There are also more opportunistic things - currencies, commodities and the like. The core of the portfolio is the liquid part of stocks and bonds. In a managed portfolio, the return on the core of the portfolio should be more or less the market return. A manager who makes 15% more has probably taken an unnecessary risk."
What are the most prominent trends at the moment in correct investing, and where is it worth putting money?
"The starting points are interest rates and inflation, and investments are also influenced by geopolitical factors, such as the Russia-Ukraine war, the Houthis, and the elections in the US.
"The projected fall in interest rates in the US is driven by the fall in inflation, which is expected to drop to 2%. At the end of 2023, the market priced in six rate cuts this year. Pictet thinks that this is ‘overshooting’, and prices in four cuts to a level of 4.25-4.5%. That's why we see great value in quality bonds rated BBB+ or higher, which mainly covers debt of companies in different geographies with a 4-5 year duration, which most 'benefits' from a drop in interest rates. It's worth switching from money market funds, which were the 'darling' of 2023, to long durations, and to lock in a return today. This is the first thing to do.
"Investors also expect a recession in the US in the first half of 2024," Alon adds. "We prefer to focus on quality companies, because we estimate that unemployment in the US will rise from 4% to 4.5%. It’s best to avoid high-yield bonds, because it will be difficult for these companies to roll over their debt."
In an election year - less emphasis on economic stability
Another point that Alon mentions is to do with tech stocks generally and artificial intelligence (AI) in particular. "There’s a great lack of certainty. In contrast to 2023, which was a year for technology shares, especially AI, investors are not compensated today for taking the risk on equity investments. Tech stocks are priced relatively high, as is the S&P 500, with a multiple of more than 20. We prefer the European and Japanese stock markets, which have lower multiples and a positive risk premium.
"We believe in the growth of AI in the long-term, but find it difficult to see similar performance in 2024. It’s possible that there will suddenly be new regulation in that area. We choose sectors that lagged the market in 2023, mainly the healthcare sector, because in a recession a defensive position has an advantage. In our view, the semiconductor market will also continue to grow, even though it has already grown a great deal. Investors who are prepared to forego liquidity premiums in order to invest in private equity and non-marketable debt as well will find higher returns there than on the stock market."
Are there sectors that you recommend avoiding?
"There is no specific sector that I recommend completely avoiding. We prefer choosing specific stocks over investment in indices. The indices are very high at present, so we are looking at the level of individual stocks. We look for companies with cash, that generate cash, that can make independent acquisitions of shares and distribute dividends, and that can withstand a recessionary period."
How will the elections in the US and other countries affect the markets?
"2024 is an election year in the US, India, Mexico, Australia, Russia, and elsewhere. This will lead to different countries acting differently on inflation and public debt. As a result, there will be differences between markets in decisions on interest rates, when the question is whether the government wants to win the election, or puts the emphasis on economic stability.
"In countries without elections, the raw data will be given more weight, compared with the election economics in other countries. However, we will not see expansive fiscal programs, because we are still 'paying the price' for the fiscal expansion of the Covid pandemic. The lowering of interest rates and the massive injection of funds by central banks during the pandemic led to a sharp increase in the value of stocks, but also to a rise in inflation. The interest rate rises to combat it will probably lead to an economic slowdown.
"All this represents fertile ground for macro hedge funds. Volatility on the market is an opportunity, for example in overweighting a certain sector or instrument."
To do things that others don’t as a philosophy
Alon became Pictet Israel CEO last year, but her path to the position was unconventional. "Originally I was supposed to be an engineer," she says, "I’m from Haifa, and I studied at the Technion, and I understood very quickly that I’m not a person for sitting in a research lab. I like interaction with people.
"I studied law and business administration at the Inter-Disciplinary Center (today Reichman University, Herzliya) and I did my internship as a lawyer. A friend who was working in the trading room at Israel Discount Bank suggested that I come for an interview, and I went along because I didn’t have anything else to do that day. I was accepted, and I decided to start working there. It was the best decision I ever made in my life, because I fell in love with the capital market - I love the adrenaline, working under pressure, and the people."
She recalls that during that period she accepted her manager’s suggestion to do things that others wouldn’t do. "I stuck to this as a philosophy from the beginning of my career and this is what has helped me stand out. At the age of 26, I was trading in billions of dollars, when every mistake has huge significance, and I really enjoyed it."
After three and a half years, when she was already managing the desk, she received an offer to work in the trading room of Citi, ‘the elite unit’ of the sector as she puts it. There, she says, she continued with the approach of doing things differently and with a "can do" attitude. "Clients sense that you are trying hard for them, and, even if it doesn’t always succeed, that builds the connection."
After that she moved to another position in private banking, and after twelve years at Citi, she received the offer from Pictet. "I was 40-years old, and I felt that I had been doing deals for fifteen years. I’m still a banker, but I wanted more," she says.
Personal: Mother to two children.
Professional: CEO Pictet Bank in Israel. Previously served as a senior director at Citi for 12 years.
Something else: Runs 10 kilometers every day.
Activity: Private Swiss bank providing wealth management services, asset management, and alternative investments. Does not engage in commercial loans.
History: Founded in 1805 and is currently the second largest bank in Switzerland with operations in Israel for more than 24 years
In Israel: Has eight employees managing services for hundreds of clients. Minimum amount for opening an account: $5 million.
Published by Globes, Israel business news - en.globes.co.il - on February 4, 2024.
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