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INTERVIEW: UBS Investment Chief For UHNWI On Asia Investments, Forex Dramas And Oil
Tom King
30 January 2015
Simon Smiles, the Zurich-based chief investment officer at the ultra high net worth arm of UBS Wealth Management, recently spoke to this publication during a trip he made to Asia. Smiles contributes to the wider house view on investment and is a member of its global investment committee. Before moving to his role in Switzerland, he had been head of Asian thematic research for UBS’s investment banking arm, so his understanding of the region is deep. Japanese Prime Minister Shinzo Abe deserves credit for at least trying to make things happen. Where do you see Japan at this time next year - will the elusive “third arrow” have been fired? And while most UHNW individuals globally have an interest in real estate, Asian investors tend to be more agnostic in the way they gain their exposure. They are usually open to buying stocks and bonds sold by property companies as well as direct investments, while the UHNW clients I speak to elsewhere tend to be more likely to just invest directly in property.
How are clients of UBS likely to be affected by the Swiss National Bank’s move to stop capping the Swiss franc? Does this raise issues for UBS specifically?
The removal of the floor was a big surprise to us and has obviously led to significant volatility in Swiss asset prices. However, the impact of these moves has been very different for different clients. The vast majority of our Swiss franc-based discretionary mandate clients weathered the storm well as they were forex hedged and had globally well diversified portfolios.
However, self-directed Swiss clients, who often have a large equity home bias and foreign investments without currency hedges, have been materially impacted by both the Swiss franc's upward move and the drop in Swiss equities.
There have been other dramatic price shifts such as the collapse in the oil price. Can you give your broad take on how this affects the kind of asset allocation views you have and that you recommend to clients?
We view the lower oil price as supportive for the two main macro views we are currently expressing in our tactical asset allocation: overweight global equities and overweight US assets relative to underweight emerging market assets. However, more broadly, the sharp moves we've already seen this year in commodities, Swiss assets, the euro, and various countries' government debt all once again highlight the importance of the only free lunch in finance – diversification.
As someone with one foot in Asia, what is your overall view about asset allocation positions in the Asia region: China, Hong Kong, Singapore, Indonesia, Malaysia, etc? Is there any general message you think needs to be made?
While we are underweight emerging market assets, Asia is in a considerably better position than its EM peers. In particular, the latest decline in commodity prices is a major tailwind for the region and offers upside surprise, not just in terms of economic momentum but also for earnings growth.
Within Asia, we currently have a preference for India, which is a prime beneficiary of lower energy prices, and Taiwan, as it is the most leveraged market on the US growth recovery. Our view is less positive, however, on Malaysia and Indonesia as they are net commodity exporters, and Singapore, which we believe will suffer from higher rates in the US. Meanwhile, China's difficult balance act between growth rebalancing and pushing through much needed reforms makes it a neutral allocation in our eyes.
What are your views on India? The market had a good run in 2014; are people now waiting to see if the government delivers?
The good news is that we can see some aspects of delivery in the data already. The value of newly started industrial projects has risen quite significantly on the back of improved approval processes in the last two quarters. More complex reforms, above all a nationwide goods and services tax, are being worked on and we consider these the next, though naturally slower, wave. Importantly, Modi is fostering competition between states, which is crucial given India's system, and we have seen the first few of them implementing labour reforms. In our view the new administration is delivering fairly well.
Most of the growth strategies of the third arrow are long-term and indirect in nature, and hence their benefits are only felt incrementally over time. However, there are a couple of measures that could have direct and short-term actual benefits for the economy. First is corporate tax reform. The government aims to cut the tax rate by 2.51 per cent in the fiscal year 2015 and bring it below 30 per cent within a few years. Much of this cut will be cancelled out by the broadening of the tax base, but it should still free up around Y200 billion (around $169 billion) of the annual tax burden over the next couple of years. The second one is state pension-fund reform. Though the reform by itself will not directly impact the economy, the amount of money the fund will unleash to buy equities and foreign assets should lift stock prices and the dollar’s value against the yen, which should then be positive for personal wealth and corporate earnings.
Do you feel any threat or dilution of your role from the emergent offerings coming from “robo-advisors" and crowd funding models?
No... Although the film Terminator did terrify me as a child.
Is there a great divergence of demands between what Asian UHNW individuals and the rest of the world want?
Home bias, large cash holdings, an entrepreneurial background, and interest in property are common to most of the UHNW clients I meet with globally. However, there are some common differences I find when speaking to clients in this part of the world. UHNW clients in Asia tend to have a more short-term approach to financial markets, often looking to trade short-term market moves. Linked to this, fewer clients in Asia tend to buy into the idea of a diversified investment portfolio.